Labor and Finance*

This paper overviews the growing literature on the effects of finance on labor. At their best, financial markets allocate resources efficiently, expanding output, investment and employment but also forcing inefficient firms to shut down or restructure. This second effect creates employment risk and costly reallocations. At firm level, this risk is mitigated by long-term employment relationships based on explicit and implicit contracts; at the macroeconomic level, it is contained via regulations and social norms. These are beneficial insofar as they improve risk sharing and encourage investment in firm-specific human capital, but may also allow managers and workers to entrench themselves and extract rents at the expenses of investors. Regulation, technological change and international trade openness affect the balance between the bright and the dark side of employment relationships.