Effects of the labour market on the financial sector at the OECD

Introduction: this paper analyzes the impact of unemployment on financial development through a non-linear relationship. Some papers have analyzed the impact of financial development on unemployment, but only a few papers have studied the inverse effect, namely the impact of unemployment on financial development. Material and methods: a non-balanced panel is used, covering all the 34 members of the OECD from 1996 to 2014, and a descriptive analysis performed. Econometric models for dynamic panel data are subsequently estimated using System GMM and Difference GMM methods. Results: a significant negative impact of unemployment on banking costs through a non-linear relationship of inverse proportionality is found. Discussion: the non-linear relationship revealed by a descriptive analysis is corroborated by these estimations. A reform of the financial sector delinking the effects of unemployment from the financial sector would avoid the undesirable effects of the links between the financial economy and the real economy.