Financial system stress and unemployment in industrial countries

Purpose. This paper analyzes how financial system turmoil affected unemployment in industrial countries during the period 1982 to 2003. Design/methodology/approach. The paper uses annual data on 17 industrial countries. It employs the IMF’s financial stress index and a large number of controls. Findings. The paper finds that, during the sample period, financial market turmoil had only moderate adverse effects on unemployment. Stress in the banking sector and stress in foreign exchange markets were particularly likely to increase unemployment, although the relevant effects were modest too. Turmoil in securities markets affected unemployment only slightly. The results are robust to variations in specification. Originality/value. While previous papers only look at a small number of banking crises, this paper’s sample includes crises in all major areas of the financial sector. Furthermore, whereas previous papers cover only major crises, it additionally takes both minor ones and periods of relative calm into account. Finally, this paper is the first to statistically control for the impact of all major determinants of labor market performance.