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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 23 de 2010


Manufacturing Employment and Exchange Rates in the Portuguese Economy:

the Role of Openness, Technology and Labour Market Rigidity

Fernando Alexandre
University of Minho and NIPE

Pedro Bação
University of Coimbra and GEMF

João Cerejeira

University of Minho and NIPE

Miguel Portela

University of Minho, NIPE and IZA

Integration into the world economy, specialization in low-technology sectors and labour market rigidity have been singled out as structural features of the Portuguese economy that are crucial for the understanding of its performance. In this paper, we explore empirically the role of openness, technology and labour market rigidity in the determination of the effect of the exchange rate on the dynamics of employment in Portugal. Our estimates indicate that employment in low-technology sectors with a high degree of trade openness and facing less rigidity in the labour market is more sensitive to movements in exchange rates. Therefore, our results provide additional evidence on the relevance of those structural features for explaining the evolution of the Portuguese economy in the last decades. In this paper the degree of labour market rigidity is measured at the sector level by means of a novel index. According to this index, high-technology sectors face less labour market rigidity. These sectors are also more exposed to international competition. However, the bulk of employment destruction has occurred in low-technology sectors. This suggests that productivity/technology may be the key variable to reduce the economy's exposure to external shocks.

JEL Classification: J23, F16, F41.

Keywords: exchange rates, international trade, job flows, labour market rigidity, technology.

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