Investment Crowding‐Out and Labor Market Effects of Financialization in the US
| Author | Ignacio González,Hector Sala |
| DOI | http://doi.org/10.1111/sjpe.12059 |
| Date | 01 November 2014 |
| Published date | 01 November 2014 |
INVESTMENT CROWDING-OUT AND
LABOR MARKET EFFECTS OF
FINANCIALIZATION IN THE US
Ignacio Gonz
alez* and Hector Sala**
ABSTRACT
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. Finan-
cialization 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 conse-
quences 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.
II
NTRODUCTION
Economic and financial activities have experienced a long period of deregula-
tion dating back to the early 1980s. Within this context, a salient feature has
been the financialization process of the non-financial corporate sector. There
has been much concern on the causes that have recently led the world econ-
omy to the Great Recession and the progressive financialization of real activi-
ties has systematically been at the core of the analysis. Less attention,
however, has been paid to the real consequences of this phenomenon, e.g., in
terms of economic growth or labor outcomes.
In this study we discuss, at a macro level, the impact of financialization on
USA unemployment through its effect on capital accumulation. In particular,
we aim at answering the following question: How much unemployment
explained by variations in capital accumulation is the result of the financial-
ization process of the non-financial corporate sector?
*European University Institute
**Universitat Aut
onoma de Barcelona and IZA
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12059, Vol. 61, No. 5, November 2014
©2014 Scottish Economic Society.
589
Figure 1 provides some preliminary information on the relationship
between these variables. In Figure 1a, we observe a negative relationship
between capital accumulation and financial payments (which is, as we explain
later in detail, our selected indicator of the financialization phenomenon).
1
In
general, periods of rapid accumulation of capital coincide with situations of
decreasing financial payments, although this is not always the case since both
variables might respond positively to common determinants such as techno-
logical shocks or other sources of business cycles fluctuations. In turn, Figure
1b displays a neat negative relationship between capital accumulation and the
unemployment rate. The two series evolve almost as a mirror image and read-
ily question the conventional wisdom according to which the evolution of
unemployment is independent of growing variables such as capital stock or
productivity (Layard et al., 1991).
Some recent literature has already documented the negative effects of the
increased financialization on real investment (e.g., Stockhammer, 2004a; Van
Treeck, 2008; Orhangazi, 2008). Our contribution seeks to go beyond the
accredited financialization-capital accumulation negative relationship, and
aims at quantifying the impact of financialization on unemployment. Never-
theless, since the transmission channel from the financialization process to its
labor outcome is capital accumulation (by way, mainly, of its employment
impact), this paper is related to that literature.
Our methodological approach, however, differs in various respects, both to
this related literature and to the mainstream one regarding macro-labor stud-
ies. First, we attach to the so called chain reaction theory (CRT henceforth)
and conceive the labor market as not driven by an equilibrium measure of
unemployment toward which the labor market unambiguously converges.
2
This implies that a concept such as the Natural Rate of Unemployment is not
central to our labor market analysis. Second, instead of focusing on the esti-
mation of a reduced form unemployment rate equation, we evaluate the con-
tribution of financialization to unemployment using a dynamic multi-equation
labor market system (with estimated labor demand, labor force, and wage
equations) that incorporates a capital accumulation equation. Third, we con-
duct counterfactual simulations to assess the macroeconomic effects of the
financialization process for capital accumulation and the performance of the
labor market. The endogenization of the capital factor in a CRT context is
one of the contributions of this study. The other one is the provision of new
1
Financial payments is the ratio between net dividends plus net interests over total pre-tax
profits of non-financial corporations (NFCOs). We focus on NFCOs not only because these
firms are directly responsible of the vast majority of gross capital formation and private job
creation but also because it is in this sector where the financialization phenomenon takes
place (it is indeed where the shareholders are, although the close link between corporate and
non-corporate firms makes it spread to all the economy). Of course, the financialization pro-
cess is also reflected in the households’ behavior (i.e., through their growing indebtedness),
but this side of the process lies beyond the scope of our analysis (confined to supply-side
issues).
2
See Karanassou et al. (2010) for a recent and comprehensive overview of the CRT
approach.
590 IGNACIO GONZ
ALEZ AND HECTOR SALA
Scottish Journal of Political Economy
©2014 Scottish Economic Society
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