Credit market imperfections and persistent unemployment

This paper develops the thesis that credit market frictions may be an impor tant contributor to high unemployment in Europe. When a change in the techn ological regime necessitates the creation of new firms, this can happen rel atively rapidly in the U.S. where credit markets function efficiently. In c ontrast, in Europe, job creation is constrained by credit market imperfecti ons, so unemployment rises and remains high for an extended period. The dat a show that there has not been slower growth in the most credit dependent i ndustries in Europe relative to the U.S., but the share of employment in th ese industries is lower than in the U.S. This suggests that although credit market imperfections are unlikely to have been the major cause of the incr ease in European unemployment, they may have played some role in limiting E uropean employment growth. (C) 2001 Elsevier Science B.V. All rights reserv ed.