Does Finance Benefit Society? Financial Sector Size and Labour Market Performance
32 Pages Posted: 6 Apr 2022
Date Written: March 16, 2022
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: Suggested Citation