Finance and Employment
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)
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
Economic Policy, Vol. 27, Issue 69, pp. 5-55, 2012
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.
Number of Pages in PDF File: 51
Date posted: January 18, 2012