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00.8 Program for the Study of Germany and Europe

Institutions and Structural Unemployment: Do Capital-Market Imperfections Matter?

2000 – Ansgar Belke and Rainer Fehn


This paper analyzes whether differences in institutional structures on capital markets contribute to explaining why some DECO-countries, in particular the Anglo-Saxon countries, have been much more successful over the last two decades in producing employment growth and in reducing unem­ ployment than most continental-European DECO-countries. It is argued that the often-blamed labor market rigidities alone, while important, do not provide a satisfactory explanation for these differ­ ences across countries and over time. Financial constraints are potentially important obstacles against creating new firms and jobs and thus against coping well with structural change and against moving successfully toward the "new economy". Highly developed venture capital markets should help to alleviate such financial constraints. This view that labor-market institutions should be sup­ plemented by capital market imperfections for explaining differences in employment performances is supported by our panel data analysis, in which venture capital turns out to be a significant insti­ tutional variable.