Credit Market Imperfections and Persistent Unemployment

Abstract

This paper develops the thesis that credit market frictions may be an important contributor to high unemployment in Europe. When a change in the technological regime necessitates the creation of new firms, this can happen relatively rapidly in the U.S. where credit markets function efficiently. In contrast, in Europe, job creation is constrained by credit market imperfections, so unemployment rises and remains high for an extended period. The data show that there has not been slower growth in the most credit dependent industries in Europe relative to the U.S., but the share of employment in these industries in lower than in the U.S. This suggests that although credit market imperfections are unlikely to have been the major cause of the increase in European unemployment, they may have played some role in limited European employment growth.

Keywords: Entrepreneurship, credit markets, European unemployment, unemployment

JEL Classification: J764, E24