Working Paper: CEPR ID: DP12711
Authors: Michael Bhm; Daniel Metzger; Per Strmberg
Abstract: Wages in the financial sector have experienced an extraordinary increase over the last few decades. A proposed explanation for this trend has been that the demand for skill has risen more in finance compared to other sectors. We use Swedish administrative data, which include detailed cognitive and non-cognitive test scores as well as educational performance, to examine the implications of this hypothesis for talent allocation and relative wages in the financial sector. We find no evidence that the selection of talent into finance has improved, neither on average nor at the top of the talent and wage distributions. A changing composition of talent or their returns cannot account for the surge in the finance wage premium. While these findings alleviate concerns about a “brain drain” into finance at the expense of other sectors, they also suggest that finance workers are capturing substantial rents that have increased over time.
Keywords: sectoral wage premia; talent allocation; earnings inequality; compensation in financial industry
JEL Codes: J24; J31; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| finance wages (J31) | productivity of finance workers (J39) |
| increase in finance wages (G29) | talent level in finance (G53) |
| finance wages (J31) | talent competition (L82) |
| wage premium (J31) | industry rents (D33) |