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There is increasing evidence that the interaction between shocks and labour market institutions is crucial to understanding the dynamics of employment. In this paper, the authors show that the inclusion of labour adjustment costs in a trade model afgfects the impact of exchange rate movements on employment. They also explore how labour market rigidities interact with the degree of exposure to international competition and with the technology level. These model-based predictions are consistent with estimates obtained using panel data for 23 OECD countries. Namely, this estimates suggest that employment in low-technology sectors that have a very high degree of openness to trade and are located in countries with more flexible labour markets are more sensitive to exchange rate changes.
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