The Relationship between Financial Development and Unemployment in Selected Countries of the European Union

Abstract

This article empirically examines the relationship between alternative measures of financial development and the unemployment rate in a selected group of ten EU countries. Using annual data for the sample period of 1991-2012, we first perform different panel regressions (using averaged and non-averaged versions of data) for unemployment rate. These panel regressions are based on a regression equation that includes inflation rate and growth rate of GDP, in addition to the level of financial development, as explanatory variables. Secondly, we apply Granger causality tests to investigate the nature of the causality between financial development and the unemployment rate for each country in our sample. The empirical findings suggest that unemployment rate and financial development are negatively correlated, and there is a statistically significant causal effect of financial development on unemployment in certain countries. However, the results are not robust to the choice of proxy measure for financial development.