Wages and Human Capital in the U.S. Finance Industry: 1909–2006*

Abstract

We study the allocation and compensation of human capital in the U.S. finance industry over the past century. Across time, space, and subsectors, we find that financial deregulation is associated with skill intensity, job complexity, and high wages for finance employees. All three measures are high before 1940 and after 1985, but not in the interim period. Workers in finance earn the same education-adjusted wages as other workers until 1990, but by 2006 the premium is 50% on average. Top executive compensation in finance follows the same pattern and timing, where the premium reaches 250%. Similar results hold for other top earners in finance. Changes in earnings risk can explain about one half of the increase in the average premium; changes in the size distribution of firms can explain about one fifth of the premium for executives.

Bank deregulation and relative wages in finance

“…The results strongly suggest that state-level bank branching deregulation did not increase wages in finance compared to other private non-farm industries. This seems to be in contradict with what Philippon and Reshef (2012) find in the aggregate level. There could be two reasons behind these conflicting results.…”

“…I follow Philippon and Reshef (2012) to construct wages in finance relative to other non-farm private industries using the Bureau of Economic Analysis (BEA). My data is, however, at the state level.…”

“…While the former includes commercial banks, the latter includes Security and Commodity Brokers and Insurance Agents and Brokers. As discussed in Philippon and Reshef (2012), bank branching affects only Credit Intermediation because it is the subsector that includes banks. Therefore, consistent with the subsector analysis of Philippon and Reshef (2012), the best way is to use the relative wages in the Credit Intermediation sector (as opposed to the total finance sector) since I am specifically interested in the impact of bank branching deregulations.…”

“…As discussed in Philippon and Reshef (2012), bank branching affects only Credit Intermediation because it is the subsector that includes banks. Therefore, consistent with the subsector analysis of Philippon and Reshef (2012), the best way is to use the relative wages in the Credit Intermediation sector (as opposed to the total finance sector) since I am specifically interested in the impact of bank branching deregulations. Table 3 presents the results of regressions estimating the impact of different types of bank deregulation on the relative wages in Credit Intermediation sector.…”

“…There has been, however, very few empirical research on why workers in finance are paid relatively higher than their peers in other industries. An exception is Philippon and Reshef (2012), who investigate the determinants of wages and human capital in the US finance industry. They argue that financial deregulations increase the complexity of jobs in the finance sector, which in turn lead to higher demand for skilled labor and higher wages of workers in the finance industry.…”