Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I EIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. This study estimates the impact of financial deregulation on top income shares. Using the novel econometric method of constructing synthetic control groups, we show that the "Big Bang"-deregulations in the United Kingdom in 1986 and Japan 1997-1999 increased the share of pre-tax incomes going to top earners by over 20 percent in the U.K. and over 10 percent in Japan. The effect is strongest in the top five percentiles in the U.K. whereas it is mainly driven by the lower part of the top decile in Japan. The findings are robust to placebo tests, alternative ways to construct synthetic controls and scrutiny of post-treatment trends. Higher earnings among financial sector employees appear to be an important mechanism behind this result.JEL Classification: D31, G18, H24, J30, N20

The Drivers of Income Inequality in Rich Countries

“…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. Philippon and Reshef () also use micro‐data to suggest deregulation in the United States (particularly the relaxing and later repeal of the Glass–Steagall Act) increased significantly the premium paid in finance, even after controlling for education.…”

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

“…Hence the “superstars” may have generated economic growth while increasing their own share of national income. A long‐run positive impact of growth in 1 on economic growth is also consistent with the theory, which ascribes the recent rise in 1 to the financial deregulation measures that commenced in the 1980s (Boustanifar et al ., Tanndal and Waldenström, ). Given the generally positive impact of financial development on economic growth (Levine, ), top income earners in the financial sector may have promoted economic growth through financial development while increasing their own share of total income.…”

“…Another important factor that is thought to have contributed significantly to the recent increase in the share of income of the top income earners is financial deregulation, which has become prevalent after the 1980s. For instance, Tanndal and Waldenström () show that top income shares increased after the two “Big Bangs” of financial deregulation: the deregulation episodes in the United Kingdom (U.K.) in 1986 and Japan in 1997–9. Similarly, using data from a set of developed economies for the period 1970–2011, Boustanifar et al .…”

“…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, ).…”

The politics of top executive compensation in advanced democracies

“…Godechot, 2016). Tanndal and Waldenström (2016) found a 20% and 10% pre-tax top income share increase in the UK and Japan. In both countries, the "Big Bang" deregulation of finance was directed towards a stronger position of both London and Tokyo stock market, relative to global standards involving more financial performances of listed companies.…”