Financial development, unemployment volatility, and sectoral dynamics

Abstract

We document a negative and signi…cant relationship between domestic …nancial development and unemployment volatility in developing and emerging economies (DEMEs). However, there is no signi…cant relationship between these variables in advanced economies (AEs). A labor-search model with production heterogeneity, sectoral …nancial frictions, and inter…rm input credit can rationalize these di¤erential crosscountry results. Unemployment volatility is decreasing in …nancial development, but the quantitative relevance of this relationship is increasing in the extent to which input credit is prevalent in an economy. This insight is consistent with the fact that, empirically, input credit is much more prominent in DEMEs compared to AEs.

Bank Development and Unemployment in Kenya: An Empirical Investigation

“…The second, but less common, trend is where the development of the financial sector is found to worsen unemployment (see, among others, Gatti and Vaubourg 2009;Shabbir et al 2012;Kanberoğlu 2014;Ogbeide, Kanwanye, and Kadiri 2015). Then, there is a third trend which confirms the neutrality effect of financial development on unemployment (see, among others, Darrat, Abosedra, and Aly 2005;Ilo 2015;Bayar 2016;Epstein and Shapiro 2018). It is quite interesting that all these trends have found empirical support.…”

“…Despite the nexus between financial development and unemployment being relatively new, the empirical trend has shown three outcomes. The first and the most common trend is where financial development has been found to have a negative impact on unemployment, implying that as the financial sector gets more and more developed, unemployment trends downwards (see, among others, Darrat, Abosedra, and Aly 2005;Gatti and Vaubourg 2009;Shabbir et al 2012;Kanberoğlu 2014;Epstein and Shapiro 2018). The second, but less common, trend is where the development of the financial sector is found to worsen unemployment (see, among others, Gatti and Vaubourg 2009;Shabbir et al 2012;Kanberoğlu 2014;Ogbeide, Kanwanye, and Kadiri 2015).…”

“…Although earlier studies recognised the importance of a well-developed financial system in solving national economic growth challenges, it is only recently that economists started focusing on examining the impact of financial development on the levels of unemployment (see, among others, Epstein and Shapiro 2018;Kanberoğlu 2014;Han 2009). Since the finance-unemployment nexus is still relatively new, a lot of African countries have not received befitting coverage, Kenya included, yet the outcome of such studies is key in driving related policies.…”

Banking Sector Instability and Economic Growth: Evidence from Turkey

“…In addition, some studies using causality analysis revealed a causality from financial development to economic growth (Aslan and Küçükaksoy, 2006;Bozoklu and Yılancı, 2013); however, in some studies a causality from economic growth to financial development was found (Kar and Pentecost, 2000;Ozcan and Ari, 2011;Güneş, 2012). The empirical studies on the effect of the financial system's main components on unemployment, tax revenues, shadow economy, development of tourism sector and environment also have been conducted and they revealed that that financial development had a significant effect on the related variables (Bayar and Öztürk, 2016;Shahbaz et al, 2016;Bayar et al, 2017;Katircioğlu et al, 2018;Epstein and Shapiro, 2019).…”

Finance and Jobs: How Financial Markets and Prudential Regulation Shape Unemployment Dynamics

“…Looking specifically at the cyclicality of the external finance premium, Chugh (2013) demonstrated that credit-market frictions amplify aggregate total factor productivity shocks, leading to large employment fluctuations that might help macro-economic models to generate realistic volatility in vacancies and job creation. 1 Part of the observed amplification of shocks has to do with the fact that larger banking sectors lead to more pronounced swings in the external finance premium (Epstein and Shapiro 2019). In addition, Gatti et al (2012) showed that the impact of financial variables also depends on the specific rigidities present in the labor market: increased stock market capitalization enhances employment volatility in particular when labor markets are flexible.…”