Exchange Rate Uncertainty and Labour Market Adjustment under Fixed and Flexible Exchange Rates

Abstract

The standard literature on working time has modelled the decisions of firms in a deterministic framework in which firms can choose between employment and overtime (given mandated standard hours). Contrary to this approach, we follow the real options approach, which allows us to investigate the value to a firm of waiting to adjust labour when the firm‘s revenues in domestic currency are stochastic and adjustment costs are sunk. The simulations reject the null hypothesis that all exchange rate regimes obey common employment adjustment thresholds.real option theory, uncertainty, working time, employment, labour demand, exchange rates.