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Using annual data for 18 OECD countries over the period 1980-2004, the authors investigate how labor and financial factors interact to determine unemployment by estimating a dynamic panel model using the system Generalized Method of Moments (GMM). They show that the impact of financial variables depends strongly on the labor market context. Increased market capitalization as well as decreased banking concentration reduce unemployment if the level of labor market regulation, union density and coordination in wage bargaining is low. The above financial variables have no effect otherwise.
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