Stock markets and unemployment in industrial countries

Abstract

Using data on 20 industrial countries for the period 1982 to 2003, this article finds that more active stock markets are likely to lower the unemployment rate. The magnitude of the effect appears to be modest but noticeable. We control for both endogeneity of stock market activity and all major determinants of unemployment. Our results are robust to variations in specification.

Notes

¹Data on ‘stock market activity’ and ‘private credit’ are from the World Bank's ‘Financial Structure Dataset’ (Beck and Al-Hussainy, 2007). Data on labour market institutions, product market regulation, tax rates, output gap and macroeconomic shocks are from Bassanini and Duval (2006); for definitions, see Ibid., Annex 2. Here tax rates, the output gap and most labour market institution variables (except for ‘high corporatism’, which is a dummy variable for a high degree of wage bargaining centralization or coordination, ‘employment protection legislation’, which is an index, and ‘unemployment benefits duration’, which is in years) are in decimal fractions rather than percentages. Furthermore, we divide the original ratings for ‘employment protection legislation’ and ‘product market regulation’ by 10; thus they range from 0 (least restrictive) to 0.6 (most restrictive). ‘Central bank independence’ is an index ranging from 0 to 1, with higher values representing more independence (IMF, 2003). Data on the (standardized) unemployment rate (%) are from OECD (2007).