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Finance and Employment

51 Pages Posted: 18 Jan 2012  

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Giovanni Pica

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Date Written: January 2012

Abstract

How does finance affect employment and inter‐industry job reallocation? We present a model that predicts that financial development (i) increases employment and/or labour productivity and wages, with a smaller impact at high levels of the equilibrium wage and financial development; (ii) may induce either more or less reallocation of jobs depending on whether shocks to profit opportunities or to cash flow predominate; (iii) amplifies the output and employment losses in crises, firms that rely most on banks for liquidity being hit the hardest. Testing these predictions on international industry‐level data for 1970–2003, we find that standard measures of financial development are indeed associated with greater employment growth, although only in non‐OECD countries, and are not correlated with labour productivity or real wage growth. Moreover, they correlate negatively with inter‐industry dispersion of employment growth. Finally, there is some evidence of a ‘dark side’ of financial development, in that during banking crises employment grows less in the industries that are more dependent on external finance and those located in the more financially developed countries.

Suggested Citation

Pagano, Marco and Pica, Giovanni, Finance and Employment (January 2012). Economic Policy, Vol. 27, Issue 69, pp. 5-55, 2012. Available at SSRN: https://ssrn.com/abstract=1987315 or http://dx.doi.org/10.1111/j.1468-0327.2011.00276.x

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Giovanni Pica

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

Via P. Amedeo 34
Milano, Mi 20122
Italy

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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