Floating Exchange Rates as Employment Protection
Yu-Fu Chen and
Gylfi Zoega
DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade
Abstract:
Floating exchange rates allow central banks to respond to aggregate demand fluctuations by changing their interest rates. However, such fluctuations create inertia in the labour market by increasing the cost of hiring and firing workers. A regime of flexible exchange rates can cause rigidities in labour markets similar to those caused by legalised firing restrictions. Exchange rate volatility makes firms wait before hiring new workers and firing existing ones. Thus the adoption of a common currency has effects very similar to the removal of employment-protection legislation and other direct restrictions on hiring and firing. Exchange-rate volatility is more harmful for the entry of new firms than employment-protection legislation, particularly promising, high-risk ventures.
Keywords: Floating Exchange Rates; Labour-market Flexibility (search for similar items in EconPapers)
JEL-codes: E32 J23 J24 J54 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2011-09
New Economics Papers: this item is included in nep-lab and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:deg:conpap:c016_038
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