This paper adds to the existing literature on finance and growth, by exploring the effect of finance on the labour market, using data on 143 countries from 1995 to 2015. We also examine whether the impact of financial development on labour is significantly different prior to and after the 2008 global financial crisis.
This paper has five main findings:
- first, the analysis confirms the positive relationship between the efficiency of and access to financial institutions and the employment rate in the linear specification;
- second, the marginal returns to employment from further financial institution inclusion diminish at high levels of inclusion and turn negative when a certain threshold is reached;
- third, the effects of financial market access on employment create a U-shaped relationship, where financial market access begins impacting on employment when a threshold of access is reached;
- fourth, the positive effect of financial development on employment strengthens with the country’s institutional quality;
- finally, there is strong support for financial development having a negative impact on employment during the 2008 global financial crisis.