Financial Development and Employment: Evidence from Transition Countries

39 Pages Posted: 19 Jun 2014

See all articles by Dorothea Schaefer

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Susan Steiner

German Institute for Economic Research (DIW Berlin)

Date Written: June 2014

Abstract

This paper studies the association between a country's level of financial development and firms' employment growth. We employ an incomplete contract model for evaluating this association. The model proposes that a high level of financial development affects the employment of firms with low managerial capital negatively, while firms with high managerial capital benefit from a more developed financial system. We test this proposition with data from the Business Environment and Enterprise Performance Survey covering transition countries in Eastern Europe and Central Asia. We use firm size as a proxy for managerial capital. Our findings confirm a non-linear effect of financial development on firm employment. Specifically, the smallest firms' edge in employment growth over large firms is dampened when the level of financial development is higher, especially in countries at medium levels of financial development.

Keywords: Financial development, employment, financial constraints, transition

JEL Classification: G20, G28, G30, J30

Suggested Citation

Schaefer, Dorothea and Steiner, Susan, Financial Development and Employment: Evidence from Transition Countries (June 2014). DIW Berlin Discussion Paper No. 1390, Available at SSRN: https://ssrn.com/abstract=2456132 or http://dx.doi.org/10.2139/ssrn.2456132

Dorothea Schaefer (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

Susan Steiner

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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