Finance and employment

How does finance affect employment and inter-industry job reallocations? We present a model that predicts that financial development (i) raises employment and wages, its impact being smaller at high levels of the equilibrium wage and financial development; (ii) may induce either more or less job reallocations, depending on whether shocks to profit opportunities or to cash flow are more prevalent; (iii) at times of crisis, it amplifies the output and employment losses, with firms that rely more on banks for liquidity provision being hit the hardest. Upon testing these predictions on crosscountry industry level data for 1970-2003, we find that standard measures of financial development are indeed associated with greater employment growth, do so only in non-OECD countries, and are not correlated with greater real wage growth. Moreover, they correlate negatively with interindustry dispersion of employment growth. Finally, there is some evidence of a “dark side” of financial development, in that in banking crisis it exacerbates employment losses. JEL Classification: E24, G01, J20, O16, O40.