Financial Development and Employment: Evidence from Transition Countries

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents inThe 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.

Financial development and self-employment

“…Their results revealed that the formalisation rates increased with the level of FD. Additionally, Schäfer and Steiner (2014) found that FD had a significant effect on the employment growth of firms. The firms in countries with a greater level of FD had a higher employment growth rate than those firms in countries with a lower level of FD.…”

“…A large body of literature indicates that FD contributes highly to economic growth. During economic expansion with a high level of FD, firms can more easily gain access to finance credit, so they want to expand their physical investment and employment (Schäfer and Steiner, 2014). Therefore, it is very possible that employment in the formal sector will increase when an economy recovers from a recession as a result of FD and this will eventually lead to lower self-employment.…”

Financial development and employment: New panel evidence

“…In the same vein, using firm-level data on a sample of Eastern European and Central Asian countries, Schäfer and Steiner (2014) explore the relationship between financial development and firms' employment growth. They find that the percentage increase in employment is higher amongst small firms than in large firms.…”