Employment, Exchange Rates and Labour MarketRigidity

There is increasing evidence that the interaction between shocks and labour marketinstitutions is crucial to understanding the dynamics of employment. In this paper, we showthat the inclusion of labour adjustment costs in a trade model affects the impact of exchangerate movements on employment. We also explore how labour market rigidities interact withthe degree of exposure to international competition and with the technology level. Our modelbasedpredictions are consistent with estimates obtained using panel data for 23 OECDcountries. Namely, our estimates suggest that employment in low-technology sectors thathave a very high degree of openness to trade and are located in countries with more flexiblelabour markets are more sensitive to exchange rate changes. Our model and estimatestherefore provide additional evidence on the importance of interacting external shocks andlabour market institutions....