Financial Development and Wage Inequality: Theory and Evidence

Jerzmanowski, Michal and Nabar, Malhar (2008): Financial Development and Wage Inequality: Theory and Evidence.

Abstract

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the US since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation and wage dispersion between skilled and unskilled workers. The experience of US states following banking deregulation provides empirical support for our hypothesis. We find that wages of college educated workers increased by between 0.5 - 1.2% following deregulation while those of workers with a high school diploma fell by about 2.2%. Similarly, residual (or within-group) inequality increased. The 90-50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.5% and 1.8%, respectively.

• Item Type: MPRA Paper
• Language: English
• Keywords: Skill Premium, Residual Wage Inequality, Financial Deregulation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies

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