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Investment Crowding-Out and Labor Market Effects of Financialization in the US

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  • Ignacio González
  • Hector Sala

Abstract

type="main" xml:id="sjpe12059-abs-0001"> This paper studies the impact of financialization on unemployment in the United States. We estimate a dynamic multi-equation macro labor model including labor demand, labor suppy, wage-setting, and capital accumulation equations. Financialization appears as a key determinant of capital accumulation which, in turn, is the transmission channel toward its unemployment effects. We conduct a series of counterfactual simulations where we quantify the macroeconomic consequences of the recent swings experienced by the financialization process. We find that it has had relevant unemployment effects in all periods considered, even in those where financial payments were not the main driver of capital accumulation. We also identify a structural change in the financialization process in the early 1980s, and find that it has caused USA unemployment to systematically fluctuate around 2 percentage points above what it would otherwise have done. We call for a reappraisal of the way financial markets work, and stress the vital need of preventing financial devices that result in productive investment crowding-out.

Suggested Citation

  • Ignacio González & Hector Sala, 2014. "Investment Crowding-Out and Labor Market Effects of Financialization in the US," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(5), pages 589-613, November.
    • Handle: RePEc:bla:scotjp:v:61:y:2014:i:5:p:589-613
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    File URL: http://hdl.handle.net/10.1111/sjpe.2014.61.issue-5
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    1. Baccaro, Lucio & Rei, Diego, 2007. "Institutional Determinants of Unemployment in OECD Countries: Does the Deregulatory View Hold Water?," International Organization, Cambridge University Press, vol. 61(3), pages 527-569, July.
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    Cited by:

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    5. Ke Guo & Xuemeng Guo & Jun Zhang, 2023. "Financial asset allocation duality and enterprise upgrading: empirical evidence from the Chinese A-share market," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-11, December.
    6. Walter Paternesi Meloni & Antonella Stirati, 2021. "What has driven the delinking of wages from productivity? A political economy-based investigation for high-income economies," Working Papers PKWP2104, Post Keynesian Economics Society (PKES).

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    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G2 - Financial Economics - - Financial Institutions and Services

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