Financialization, Profitability and Employment Growth
Authors:   Asia-Europe Perspective Association, Suh Hanseok 
Published: December 2024

One of the stylized facts of advanced income countries including S.Korea since 1980s is employment growth stagnation. There are four theoretical approaches to explain this feature; secular stagnation thesis(Teulings and Baldwin, 2014) theory of intangible economy(Haskel and Westlake, 2018). globalization-cum- skill biased technological change(Autor et al., 2003), and financialization research(Davis, 2016). In this paper we argue that financialization has deeply associated with declining real economic activity such as shrinking employment growth and investment weakness. Financialization is perhaps most commonly defined as “the growing influence that financial forces, markets and investors have had on world economic dynamics”(Stockhammer, 2004; Crotty, 2005; Epstein, 2005; Krippner, 2005; Palley, 2007; Hein, 2008, 2011; Orhangazi, 2008; Dallery, 2009; Lapavitsas, 2009; Bellamy, 2010) or it “refers to the growing influence of financial actors whether direct or mediated via markets over the real economy and the growing portion of corporate revenue and profits deriving from financial transactions”(Krippner 2005; Davis 2009).
Four types of financialization have been identified: the rising trend of the financial sector as a whole; the growing importance of the financial markets; the financialization of non-financial corporations(NFCs); and the increasing household debt and financial investments. Among these we focus on how the financialization of NFCs affects real economic activities in terms of job creation and physical investment. We argue that the financialization of NFCs affects employment through three channels: First, NFCs increasingly resemble financial firms, which leads to growing importance of both financial investment and financial profits rather than operating income. Therefore financialization of NFCs are positively associated with financial activity while negating real economic activities(Epstein, 2005). Second, even though traditional theory of the firm views higher profitability results in higher firm growth(Coad, 2009), nexus between firm profitability and growth has been eroded mostly due to financialization of NFCs. Third, employment performance of NFCs are increasingly dependent upon both the level of financial market liberalization and the extent of shareholder value maximization. Building on three channels of financialization effects on employment we provide three testable hypotheses: (Hypothesis 1) Financialization of NFCs directly discourages employment growth; (Hypothesis2) NFCs’ profitability has direct negative effects on employment growth; (Hypothesis 3) How does NFCs’ profitability affect employment growth depends on the degree of financialization.
To test those three hypotheses we build a regression model for employment growth based on the theory of firm growth, thereafter we use data on Korean publicly listed firms for the period 1988-2017 and estimate a dynamic panel model using the system GMM.
The empirical evidence shows that: (1) the direct effect of financialization on employment growth rate is negative and statistically significant only during the period of 2008～2017; (2) over the whole period firm’s profitability does not have direct negative effects on employment growth, which means profitability could contribute to employment growth. Such a result invalidates the financialization hypothesis; (3) How does the indirect effects of profitability on employment growth depend on financialization can be estimated by using interaction term of (profit rate×financialization).