Working Paper: CEPR ID: DP16798
Authors: Julia Fonseca; Adrien Matray
Abstract: We use a large expansion of government-owned banks in cities with extremely low bank branch coverage and data on the universe of formal-sector employees in Brazil over 2000-2014 to study how financial development affects economic development and wage inequality. We find that higher financial development fosters firm creation and firm expansion, which increases labor demand and leads to higher average wages, especially for cities initially located in banking deserts. The gains produced by higher financial development are not shared equally, but instead monotonically increase with workers’ productivity, which leads to a substantial increase in inequality. This increase is concentrated in cities where the initial supply of skilled workers is low, showing that talent scarcity is an important driver of how financial development affects inequality.
Keywords: Financial Development; Wage Inequality; Economic Development; Brazil
JEL Codes: D14; G21; O15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banks for All program (G21) | increase in number of firms (L26) |
| Banks for All program (G21) | increase in average establishment size (L25) |
| Banks for All program (G21) | increase in employment (J68) |
| Banks for All program (G21) | rise in average wages (J31) |
| financial development (O16) | increased wage inequality (J31) |
| increase in employment (J68) | increased wage inequality (J31) |
| increase in average wages (J31) | increased wage inequality (J31) |