Banking System Concentration and Labor Market Performance in Industrial Countries

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.