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Investment Crowding-Out and Labor Market Effects of Financialization in the U.S

  • González, Ignacio

    ()

    (European University Institute)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

This paper studies the impact of financialization on unemployment in the U.S. We estimate a dynamic multi-equation macro labor model including labor demand, labor supply, wage-setting and capital accumulation equations. Financialization appears as a key determinant of capital accumulation which, in turn, is the transmission channel towards its unemployment effects. We conduct a series of counterfactual simulations where we quantify the macroeconomic consequences of the recent swings experienced by the financialization process. We find that it has had relevant unemployment effects in all periods considered, even in those where financial payments were not the main driver of capital accumulation. We also identify a structural change in the financialization process in the early 1980s, and find that it has caused U.S. unemployment to systematically fluctuate around 2 percentage points above what it would otherwise have done. We call for a reappraisal of the way financial markets work, and stress the vital need of preventing financial devices that result in productive investment crowding-out.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7272.

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Length: 30 pages
Date of creation: Mar 2013
Date of revision:
Publication status: published in: Scottish Journal of Political Economy, 2014, 61 (5), 589-613
Handle: RePEc:iza:izadps:dp7272
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  1. Philip Arestis & Michelle Baddeley & Malcolm Sawyer, 2007. "The Relationship Between Capital Stock, Unemployment And Wages In Nine Emu Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 59(2), pages 125-148, 04.
  2. Arestis, Philip & Mariscal, Iris Biefang-Frisancho, 2000. "Capital Stock, Unemployment and Wages in the UK and Germany," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 487-503, November.
  3. Baccaro, Lucio & Rei, Diego, 2007. "Institutional Determinants of Unemployment in OECD Countries: Does the Deregulatory View Hold Water?," International Organization, Cambridge University Press, vol. 61(03), pages 527-569, July.
  4. Andrew Glyn, 2003. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," Economics Series Working Papers 168, University of Oxford, Department of Economics.
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