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Financial Development and Wage Inequality: Theory and Evidence

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  • Jerzmanowski, Michal
  • Nabar, Malhar

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9841.

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Date of creation: 08 Oct 2008
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Handle: RePEc:pra:mprapa:9841

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Keywords: Skill Premium; Residual Wage Inequality; Financial Deregulation;

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  1. Oded Galor & Omer Moav, 1998. "Ability Biased Technological Transition, Wage Inequality, and Economic Growth," Working Papers 98-14, Brown University, Department of Economics.
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Cited by:
  1. Asli Demirg��-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
  2. Petra Marotzke, 2011. "Macroeconomic Stability and Wage Inequality: A Model with Credit and Labor Market Frictions," Working Paper Series of the Department of Economics, University of Konstanz 2011-38, Department of Economics, University of Konstanz.
  3. Kohei Daido & Ken Tabata, 2012. "Skill-Biased Technological Change, Organizational Change, and Wage Inequality," Discussion Paper Series 84, School of Economics, Kwansei Gakuin University, revised Feb 2012.
  4. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, vol. 65(5), pages 1637-1667, October.
  5. Thorsten Beck & Ross Levine & Alexey Levkov, 2007. "Big Bad Banks? The Impact of U.S. Branch Deregulation on Income Distribution," NBER Working Papers 13299, National Bureau of Economic Research, Inc.

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