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

  • Donatella Gatti

    (CEPN - Centre d'Economie de l'Université Paris Nord (ancienne affiliation) - Université Paris 13 - CNRS - Centre National de la Recherche Scientifique, IZA - Institute for the Study of Labor, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics, CEPREMAP - Centre pour la recherche économique et ses applications)

  • Anne-Gaël Vaubourg

    ()

    (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

Using data for 18 OECD countries over the period 1980-2004, we investigate how labour and financial factors interact to determine unemployment. We show 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. The above financial variables have no effect otherwise. Increasing intermediated credit worsens unemployment when the labour market is weakly regulated and coordinated, whereas it reduces unemployment otherwise. These results suggest that the respective virtues of bank-based and market-based finance are crucially tied to the strength of labour regulation.

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Handle: RePEc:hal:cepnwp:halshs-00566792
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