Does Finance Benefit Society? Financial Sector Size and Labour Market Performance

32 Pages Posted: 6 Apr 2022

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Iuliia Udoieva

University of Marburg - School of Business & Economics

Date Written: March 16, 2022

Abstract

We examine a large sample of some 100 economies worldwide to study the impact of financial sector size expansion on labour market performance. Estimating dynamic panel data models inspired by the well-developed finance-growth literature, we find that on average a larger financial sector is beneficial for the labour market as it reduces unemployment rates. However, estimating country- and period-specific benchmark levels of financial sector size, we find evidence that the relative contribution of finance vanishes with excessive levels of finance, and excessive levels of credit may actually be detrimental to employment. These non-linearities in the finance-unemployment nexus are more pronounced within developed economies. Overall, our study sheds new light on the ongoing controversy about the impact of the financial sector on societal well-being and highlights the importance of monitoring the expansion of the financial sector, in particular when it comes to credit markets.

Keywords: finance, financial development, labour markets, unemployment, non-linearities

JEL Classification: E22, E24, E44

Suggested Citation

Rapp, Marc Steffen and Udoieva, Iuliia, Does Finance Benefit Society? Financial Sector Size and Labour Market Performance (March 16, 2022). Available at SSRN: https://ssrn.com/abstract=4059651 or http://dx.doi.org/10.2139/ssrn.4059651

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

Iuliia Udoieva

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

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