Exchange rates, employment and labour market rigidity∗

In this paper we study the effect of labour market rigidity on the impact of exchange rate shocks on employment. We use a panel dataset comprising 22 manu-facturing sectors across 23 OECD countries. In our econometric model, the impact of exchange rate fluctuations on sectoral employment is mediated by the degree of openness and by a measure of labour market rigidity: the OECD’s employ-ment protection legislation index. Our results suggest that greater labour market rigidity reduces the impact of exchange rate shocks on employment. This effect is statistically significant for low-technology sectors