VOX  CEPR Policy Portal

The Great Recession sparked the interest in the link between financial conditions and employment. This column describes results from a new model of labour and finance, incorporating financial imperfections and borrowing constraints. The results uncover a complementarity between firms holding cash and labour market imperfections. Firms embedded into better functioning financial sectors are, on average, less inclined to hold cash. In addition, a more financially integrated system would dismiss more labour, explaining the higher increase of unemployment in the US compared to Europe.