Academic journal article Contemporary Economic Policy

Banking System Concentration and Labor Market Performance in Industrial Countries

Academic journal article Contemporary Economic Policy

Banking System Concentration and Labor Market Performance in Industrial Countries

Article excerpt

Using data on 21 industrial countries from the period 1987 to 2009 and a large number of controls, this paper finds that a more concentrated banking sector is likely to raise the unemployment rate and reduce the employment rate. The magnitude of these effects appears to be moderate. The results are robust to potential endogeneity of the bank concentration variable as well as to numerous variations in specification. They are important because, as a consequence of the recent global financial crisis, many industrial countries have experienced both an increase in banking system concentration and a deterioration in labor market performance. (JEL E24, G21, J64, L16)

I. INTRODUCTION

Many theoretical and empirical studies analyze the impact of banking system concentration on financial intermediation and economic development. By contrast, there are no studies on the effects banking system concentration may have on labor market performance. The topic is important because, as a result of the recent global financial crisis, many industrial countries have experienced both an increase in bank concentration and a deterioration in labor market performance.

This paper empirically studies the effects of banking system concentration on labor market performance in industrial countries. Section II briefly summarizes the results from previous theoretical and empirical studies that are relevant for this paper. Based on these studies, it also conjectures about possible effects of banking system concentration on labor market performance. Section III describes both our measure of banking system concentration and our control variables. Section IV describes our dependent variables, sample and estimation method. Section V presents and discusses the regression results. Section VI concludes.

II. RELATED LITERATURE

Some theoretical studies argue that a more concentrated banking industry may be beneficial to economic development because banks with monopoly power have a greater incentive to forge and maintain long-term relationships with firms, facilitating their access to credit (Mayer 1988, 1990; Petersen and Rajan 1995). This in turn may foster long-term investment and economic development (Dewatripont and Maskin 1995). Indeed, several historical studies suggest that a concentrated banking industry had a favorable impact on economic development in several countries such as Italy (Cohen 1967), Japan (Mayer 1990), France, and Germany (Gerschenkron 1962).

Conversely, one may argue that a highly concentrated banking sector reduces competition, increases inefficiencies and harms firms' access to credit, dampening economic development. Pagano (1993), for example, highlights these effects in a simple endogenous growth model. Several empirical studies find that a more concentrated banking system increases the cost of intermediation and dampens growth. For example, using data on 80 countries from 1988 to 1995, Demirguc-Kunt and Huizinga (1999) find that a higher concentration ratio leads to higher interest margins. According to Corvoisier and Gropp (2002), who use data on ten western European countries for the period of 1993-1999, increasing concentration may have led to collusion and higher interest margins for loans and demand deposits. Using data on 41 countries from 1980 to 1996, Cetorelli and Gambera (2001) find that bank concentration has a depressing effect on overall economic growth. According to Carlin and Mayer (2003), who use data on 14 industrial countries over the period of 1970-1995, banking system concentration is negatively associated with growth of equity-financed and skill-intensive industries. Using data from 1976 to 1994, Black and Strahan (2002) find evidence across U.S. states that higher bank concentration leads to a decline in business formation.

Given these previous studies, the impact of a more concentrated banking sector on labor market performance may be either beneficial or detrimental. …

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