This paper examines the effects of increased intra-industry trade on the labour market adjustment costs in Portugal’s automobile industry. Using a static and dynamic panel data approach, the results show a negative correlation between changes of employment and marginal intra-industry trade. These results confirm the smooth adjustment hypothesis (SAH). Whereas most of the empirical studies have tested the SAH considering all of the industries within an economy, the present paper tests the same hypothesis considering solely the reallocation of labour within the automobile industry (between sectors of this industry). The results also suggest that there is no great difference between static and dynamic results. Keywords: Adjustment costs, Automobile industry, Marginal intra-industry trade, Panel data JEL classification: F14; C33.