This paper reviews economic studies on the effects of various aspects of finance on labour market outcomes.
The paper is a systematic literature review that reviews the weight of the evidence on the relationships between specific elements of finance and labour outcomes. The review is divided into three major sections: (1) job quantity and job quality; (2) distributional effects; and (3) resilience and adaptability.
Finance interacts with labour market institutions to jointly determine labour outcomes. Firm financial structures influence their labour practices – highly leveraged firms show greater employment volatility during cyclical fluctuations, and leverage strengthens firm bargaining power in labour negotiations. Bank deregulation has mixed impacts on labour depending upon the state of prior bank regulations and labour markets. Leveraged buyouts tend to dampen acquired-firm job growth as they pursue labour productivity gains. The shareholder value movement may contribute to short-termism among corporate managers, which can divert funds away from firm capital accumulation toward financial markets, and crowd out productive investment. Declining wage shares of national income in most OECD countries since 1990 may be driven in part by financial globalisation. The financial sector contributes to rising income concentration near the top of the distribution in developed countries. The availability of finance is associated with increased reallocation of labour, which may either enhance or impede productivity growth. Finally, rising interest rate environments and homeowners with mortgage balances that exceed their home's value may reduce labour mobility rates.
This review contributes to the understanding of the effects of finance on labour by reviewing and synthesising a large volume of literature.
Mark Heil is an economist at the US Department of the Treasury. He drafted this paper while seconded to the Organisation for Economic Cooperation and Development (OECD) Economics Department. This paper is based on OECD Economics Department working paper number 1495 of the same title. The thoughts expressed in this paper do not necessarily reflect the views of the US Treasury or the OECD. He is grateful to Boris Cournede, Oliver Denk, Peter Hoeller, Rory O Farrell and Cyrille Schwellnus of the OECD Economics Department for suggestions on earlier drafts. He also appreciates thoughtful review comments by Pranav Bhandarkar, Cary Elliott, Abraham C. Leventhal, Joanna Murphy, Matthijs Schendstok and Laura Wilcox, who are formerly or presently with the US Treasury, and comments by two anonymous journal referees.
Heil, M. (2020), "How does finance influence labour market outcomes? A review of empirical studies", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-03-2019-0147Download as .RIS
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