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Unemployment and finance: how do financial and labour market factors interact?

  • Donatella Gatti
  • Christophe Rault
  • Anne-Gael Vaubourg

Using annual data for 18 OECD countries over the period 1980-2004, we investigate how labour and financial factors interact to determine unemployment. We estimate a dynamic panel model using the system Generalized Method of Moments (GMM). It is shown that the impact of financial variables depends strongly on the labour market context. Increased market capitalization as well as decreased banking concentration reduce unemployment if the level of labour market regulation, union density, and coordination in wage bargaining is low. Increasing intermediated credit and banking concentration is beneficial for employment when the degree of labour market regulation, union density, and wage coordination is high. These results suggest that the respective virtues of intermediated and market-based finance are crucially tied to the labour market context. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 64 (2012)
Issue (Month): 3 (July)
Pages: 464-489

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Handle: RePEc:oup:oxecpp:v:64:y:2012:i:3:p:464-489
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