Wages and Human Capital in Finance: International Evidence, 1970-2005

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".

Finance, Talent Allocation, and Growth

“…Data on employment, hours worked, and wages are available for each group at the sectoral level. WORLD-KLEMS 2008 has been used by Philippon and Reshef (2013), Boustanifar, Grant, and Reshef (2017), Larrain (2015) and Pellegrino and Zingales (2017). A detailed description of the country-level sources and the steps used to produce harmonized cross-country data is in Timmer, von Moergastel, Stuivenwold, and Ypma (2007).…”

“…We define the financial sector in a broad sense -it includes banks, insurances, pension funds, and other activities related to financial intermediation (KLEMS code "J" for Financial Intermediation). 13 Following Philippon and Reshef (2013) and Boustanifar, Grant, and Reshef (2017), we define the relative wages of high-skilled workers in the financial sector compared to all the other sectors as the average wage of skilled workers in finance divided by the average wage of skilled workers in the country for each country c and year t, which we label wage skill c,f in,t . Average wages equal total labor compensation divided by the total full-time equivalent (FTE) employ- 13 This sector aggregates three industry groups: "Financial intermediation, except insurance and pension funding," "Insurance and pension funding, except compulsory social security," and "Activities related to financial intermediation".…”

“…Over the last four decades, the size of the financial sector has grown considerably all over the world. Rising compensation of finance workers has followed (e.g., Kaplan and Rauh (2010), Philippon and Reshef (2012), and Boustanifar, Grant, and Reshef (2017)). Academics and policy makers worry that excessive finance compensation might distort the efficient allocation of talent in the economy, because talented individuals maximize their private return by moving into lucrative finance jobs instead of engaging in occupations that generate higher social returns, such as entrepreneurship and scientific research.…”

“…9 7 This result is consistent with the evidence in Bertrand, Goldin, and Katz (2010), Oyer (2008), andShu (2013), as well as in Philippon and Reshef (2012) and Gupta and Hacamo (2017). 8 The AGFW does not vary systematically with episodes of financial deregulation, because the increase in the finance wage premium post-deregulation (e.g., Philippon and Reshef (2012) and Boustanifar et al (2017)) is accompanied by a parallel increase in the finance value-added premium. 9 The opposite signs of the growth of finance relative wages and the growth of finance value added further 4 Our baseline negative association between skilled workers in non-finance sectors and the AGFW might be driven by unobserved time-varying country-specific variables, which are correlated with the AGFW and with the allocation of skills across sectors.…”

“…Cecchetti and Kharroubi (2015) report that credit growth is more detrimental to the productivity growth of R&D-intensive manufacturing sectors. Boustanifar, Grant, and Reshef (2017) find high wages in finance attract skilled workers from other countries. Gupta and Hacamo key advantages of our cross-country and cross-industry approach are the ability to exploit large cross-sectional variation in finance wages, which is hard to detect within countries, and to empirically link talent allocation to outcomes at the sectoral and country levels.…”