Unemployment dynamics with international capital mobility

We study the response of domestic unemployment rates to shocks in total factor productivity for economies with high capital mobility and low labour mobility. We show that rapid capital movements across national borders, like those experienced by developed nations in the last twenty years, substantially amplify the impact on the domestic unemployment rate of domestic fluctuations in total factor productivity relative to what would have happened in a closed economy, shorten the duration of the responses and raise the variability of employment. Capital flows increase the riskiness of labour income and reduce the riskiness of capital income.