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

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.