Unemployment and Finance:How do Financial and Labour Market FactorsInteract?

Using annual data for 18 OECD countries over the period 1980-2004, we investigate howlabour and financial factors interact to determine unemployment by estimating a dynamicpanel model using the system generalized method of moments (GMM). We show that theimpact of financial variables depends strongly on the labour market context. Increasedmarket capitalization as well as decreased banking concentration reduce unemployment ifthe level of labour market regulation, union density and coordination in wage bargainingis low. The above financial variables have no effect otherwise. Increasing intermediatedcredit and banking concentration is beneficial for employment when the degree of labourmarket regulation, union density and coordination in wage bargaining is high. These resultssuggest that the respective virtues of ed and market-based finance are crucially tied to thelabour market context....