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"Since You're So Rich, You Must Be Really Smart": Talent, Rent Sharing, and the Finance Wage Premium

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  • Böhm, Michael Johannes

    (TU Dortmund)

  • Metzger, Daniel

    (Erasmus University Rotterdam)

  • Strömberg, Per

    (CEPR)

Abstract

Financial sector wages have increased extraordinarily over the last decades. We address two potential explanations for this increase: (1) rising demand for talent and (2) firms sharing rents with their employees. Matching administrative data of Swedish workers, which include unique measures of individual talent, with financial information on their employers, we find no evidence that talent in finance improved, neither on average nor at the top. The increase in relative finance wages is present across talent and education levels, which together can explain at most 20% of it. In contrast, rising financial sector profits that are shared with employees account for up to half of the relative wage increase. The limited labor supply response may partly be explained by the importance of early-career entry and social connections in finance. Our findings alleviate concerns about "brain drain" into finance but suggest that finance workers have captured rising rents over time.

Suggested Citation

  • Böhm, Michael Johannes & Metzger, Daniel & Strömberg, Per, 2022. ""Since You're So Rich, You Must Be Really Smart": Talent, Rent Sharing, and the Finance Wage Premium," IZA Discussion Papers 15337, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15337
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    More about this item

    Keywords

    earnings inequality; rent sharing; talent allocation; industry wage premia; compensation in financial sector;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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