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Does Finance Benefit Society? Financial Sector Size and Labor Market Performance

Marc Steffen Rapp (Philipps-Universität Marburg, Germany)

Iuliia A. Udoieva (Philipps-Universität Marburg, Germany)

Fintech, Pandemic, and the Financial System: Challenges and Opportunities

ISBN: 978-1-80262-948-4, eISBN: 978-1-80262-947-7

Publication date: 17 January 2023

Abstract

We examine a large sample of some 100 economies worldwide to study the impact of financial sector size expansion on labor market performance. Simple linear dynamic panel data models inspired by the well-developed finance-growth literature suggest that (on average) a larger financial sector is beneficial for the labor market as it reduces unemployment rates. However, estimating country- and period-specific benchmark levels of financial sector size, we document that the relative contribution of finance vanishes with excessive levels of finance, and excessive levels of credit may actually be detrimental to employment. These non-linearities in the finance-unemployment nexus are more pronounced within developed economies. Overall, our study sheds new light on the ongoing controversy about the impact of the financial sector on societal well-being and highlights the importance of monitoring the expansion of the financial sector, in particular when it comes to credit markets.

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Acknowledgements

Acknowledgments

We would like to thank the editor Suk-Joong Kim, an anonymous referee, and Andrew Reek for their valuable comments and suggestions. Marc Steffen Rapp is affiliated with the Nordic Finance and the Good Society Project II conducted by the Center for Corporate Governance at Copenhagen Business School and serves as an academic co-director at the Marburg Centre for Institutional Economics (MACIE). Any errors of analysis and interpretation are our own.

Citation

Rapp, M.S. and Udoieva, I.A. (2023), "Does Finance Benefit Society? Financial Sector Size and Labor Market Performance", Kim, S.-J. (Ed.) Fintech, Pandemic, and the Financial System: Challenges and Opportunities (International Finance Review, Vol. 22), Emerald Publishing Limited, Leeds, pp. 273-295. https://doi.org/10.1108/S1569-376720220000022013

Publisher

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Emerald Publishing Limited