Competitiveness and Employment in a Small Open Economy

The model developed in this article leads to a reduced form that synthesizes the relevant determinants of job creation in a small open economy. Among these factors, we stress the role of competitiveness that is measured by an indicator taking into account the foreign price sensitiveness of domestic exporters. Our model shows that the stronger the price setting power of domestic firms, the greater the impact of competitiveness on employment is. The model is used to empirically estimate the determinants of job creation over the period 1970-1998, in Luxembourg, a small economy, where employment expanded dramatically during the last decades.