“Since You’re So Rich, You Must Be Really Smart”: Talent, Rent Sharing, and the Finance Wage Premium

Abstract

Financial sectorwages have increased extraordinarily over the last decades.We address two potential explanations for this increase: (1) rising demand for talent and (2) firms sharing rents with their employees. Matching administrative data of Swedish workers, which include unique measures of individual talent, with financial information on their employers, we find no evidence that talent in finance improved, neither on average nor at the top. The increase in relative finance wages is present across talent and education levels, which together can explain at most 20% of it. In contrast, rising financial sector profits that are shared with employees account for up to half of the relative wage increase. The limited labor supply response may partly be explained by the importance of early-career entry and social connections in finance. Our findings alleviate concerns about “brain drain” into finance but suggest that finance workers have captured rising rents over time.

Academic publishing behavior and pay across business fields

“…Finally, we offer a competitive analysis of publication probabilities that offers a unique insight into how wages are set within a dynamic competition of publication rates. In a sense, the analyses in both Célérier et al (2021) and Böhm et al (2023) buttress our findings and lend support to our main thesis.…”

Does it pay off to invest in bank staff training? Survey‐based evidence from an emerging market banking sector

“…We argue that banks with higher wages employ higher-skilled staff, which positively contributes to the revenue efficiency and cost structure of the bank. We could not disentangle the effects of different contributors to higher wages (skills, rent sharing, similar to Böhm et al (2018), for the Swedish financial sector), as extensive reported data would have been required for this purpose. However, we assert that in a small, developing financial system overwhelmingly dominated by banks (as the Romanian case), the hunt for relevant talents mostly translates in higher wages compared to peers, thus the quality effect is expected to prevail.…”

“…Böhm et al. (2018) highlight, from a causal perspective, using Swedish micro‐data, that increases in relative finance wages are explained by talent and education levels to a limited extent (at most 20%), but rising financial sector profits that are shared with employees account for up to half of the relative wage increase. Labour market frictions are found to be particularly large in finance.…”

The Growth of Finance is Not Remarkable

“…An additional concern is that the very high wages in certain finance occupations, such as investment banking, draw skilled workers away from more socially important parts of the economy, or even from other countries (e.g., Böhm, Metzger, and Strömberg (2018), Boustanifar et al (2018)). Although our work does not directly address this concern, it does provide some important context for evaluating it.…”

“…Finally, although our analysis shows that there is nothing unusual about the growth of the financial sector over the course of the 20th century, this does not mean there are no interesting things going on in financial services that deserve scrutiny and study. For example, wages are high in finance, particularly in the securities subsector (see, e.g., Kaplan and Rauh (2010), Philippon and Reshef (2012), Axelson and Bond (2015), Bolton, Santos, and Scheinkman (2016), Böhm, Metzger, and Strömberg (2018), Boustanifar, Grant, and Reshef (2018), and Célérier and Vallée (2019)). The high finance wages are potentially interesting for multiple reasons, including issues related to brain drain and income inequality.…”