Wages and Human Capital in Finance: International Evidence, 1970–2011*

Abstract

We study the allocation and compensation of human capital in the finance industry in a set of developed economies in 1970-2005. Finance relative skill intensity and skilled wages generally increase but not in all countries, and to varying degrees. Skilled wages in finance account for 36% of increases in overall skill premia, although finance only accounts for 5.4% of skilled private sector employment, on average. Financial deregulation, financial globalization and bank concentration are the most important factors driving wages in finance. Differential investment in information and communication technology does not have causal explanatory power. High finance wages attract skilled international immigration to finance, raising concerns for "brain drain".

The Drivers of Income Inequality in Rich Countries

“…Last but not least, using macro‐data for 15 developed countries between 1970 and 2005, Boustanifar et al . () also find financial deregulation to be the most important driver of the rapid increase in wages in finance relative to other sectors. They also find that the effect is larger in less competitive financial sectors, in more flexible labour markets and where ‘non‐traditional’ banking (versus loan‐based banking) is more developed.…”

“…Several studies have linked the financial deregulation of the 1980s to increases in inequality (particularly considering that finance is the highest paying industry in many developed countries, e.g. Boustanifa et al ., ). Tanndal and Waldenstrom () use micro‐data to connect the ‘Big Bang’ of 1986 (the United Kingdom) and 1997–1999 (Japan) with the observed higher top income shares.…”

Competition for traders and risk

“…One can argue that in the past decades, globalization has increased competition for traders between banks internationally. Indeed, Boustanifar, Grant, and Reshef () find that high wages in finance succeed in attracting skilled workers across borders. If we assume that top traders migrate more easily, say from London to Hong Kong, than average traders, then this international competition has decreased more than .…”

“…We show that competition does increase the risk induced by traders' incentive contracts when there is both trader moral hazard over investment projects and adverse selection on trader abilities. Boustanifar, Grant, and Reshef () show empirically that wages in the financial sector have increased in response to deregulation, and that this effect is stronger in environments where asymmetric information is more severe. Evidence for the fact that traders differ in their trading skills (and that their trading results are not merely a matter of luck) was provided by, for instance, Berk and Green ().…”

Do Rising Top Incomes Spur Economic Growth? Evidence From OECD Countries Based on a Novel Identification Strategy

“…Therefore, the “superstars” might have been an important driving force behind our result that 1—but not 9—has a long‐run impact on economic activity. Second, our result is also in line with the hypothesis that the financial deregulation of the past four decades, through its role in driving up wages in the financial sector, is partly responsible for the recent rise in top income inequality (Boustanifar et al ., ; Tanndal and Waldenström, ). Given that these high‐wage earners likely belong to the top percentile earners, the result that 1—but not 9—has a long‐run impact on economic activity could also be reflecting the positive role of financial deregulation in economic development (see, e.g., Levine, ).…”