Abstract: We compute an index of sectoral labor market flexibility and use it to estimate the effect of exchange rate movements on employment in Portugal. Our sectoral index indicates that manufacturing labor markets have become more flexible in recent years, albeit at a different pace from what the OECD's EPL index suggests. Furthermore, our index shows that there is heterogeneity at the sector level. Our econometric application indicates that our measure of sectoral labor market flexibility, alongside the level of technology and trade openness, is relevant for understanding the reaction of employment to movements in exchange rates.