The key explanatory variables in our analysis are indicators of financial structure that are drawn from the World Bank Database on Financial Development and Structure, which was updated in November 2010.<sup>7</sup> We rely on two primary variables that are intended to capture different aspects of each country‘s financial structure – the ratio of private credit to GDP and the ratio of stock market capitalization to GDP. From previous research on the finance-growth nexus, we would expect growth in employment to be positively linked to both of these measures. However, the new structural economics predicts that the association between firm growth and private credit relative to GDP, which is a bank-based measure of financial development, should be stronger for countries in early stages of development. By contrast, the association between employment growth and stock market capitalization (relative to GDP) is likely to be stronger for countries in more advanced stages of economic development.

Another aspect of financial structure that could impact firm growth is the nature of ownership—the extent to which the banking sector is state-owned or foreign. As we shall later show, however, neither state nor foreign ownership of banks explains variation in labor growth in our sample. The ratios of private credit to GDP and stock market capitalization to GDP are therefore the focus of the empirical analysis that follows.<sup>8</sup> Perhaps the first thing to notice from Table 2, which provides summary statistics for our four indicators of financial development, is that country coverage is broader for the private credit 7 More detailed descriptions of the dataset can be found in Beck, Demirguc-Kunt, and Levine (2000) and Beck and Demirguc-Kunt (2009). The permanent URL for accessing the dataset is: http://go.worldbank.org/X23UD9QUX0. 8 In banking systems characterized by a high degree of ownership by the government, banks‘ credit growth, portfolio quality, profitability, and productivity tend to suffer (Barth, Caprio, and Levine 2001; 2004; La Porta, Lopez-deSilanes, and Shleifer 2002). We would therefore expect the employment growth of firms to be slower in countries with state-dominated banking systems. Our data on the share of banking sector assets held by state-owned banks is taken from Micco, Panizza, and Yañez (2007). We do not have a strong prior about whether any pernicious effects of state ownership of banks would be stronger or weaker in countries in early development stages. The share of foreign bank ownership could also affect firms‘ employment growth. On the one hand, foreign banks tend to be more efficient than domestic banks in developing countries (see, e.g., Claessens, Demirguc-Kunt, and Huizinga, 2001). Their presence could therefore impose competitive pressure, resulting in lower interest rates on loans and, perhaps, a search for new borrowers, thus expanding the outreach of the banking system. All of these aspects of foreign bank participation could boost firms‘ labor growth. At the same time, there are longstanding concerns about the tendency of foreign banks to focus their lending on large, well-established firms. In banking sectors dominated by foreign banks, medium and small-sized borrowers might suffer in terms of access to credit, resulting in slower labor growth. Proponents of New Structural Economics would be especially concerned about the mismatch between foreign-owned banks and the large share of small businesses in developing countries. We test these ideas in our labor growth regressions using data on the share of banking sector assets held by majority-foreignowned banks from Claessens and Van Horen (2009).

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