Wages and the Role of Intangibles in Finance

This paper investigates the role of intangible and ICT capital in the growth of relative finance wages. Within a multi-level nested production framework, we find that the degree and effects of complementarity between skilled labor and different categories of capital are much more pronounced in finance than in the rest of the market economy. The stronger positive effects of such complementarity on finance skill premia are further reinforced by relatively stronger technical change in the sector. Controlling for various factors, subsequent reduced-form analysis also indicates that rising intangible or ICT capital in finance relative to that in non-finance increases corresponding relative aggregate and skilled finance wages through complementarity and volume effects. This implies that skill composition matters for relative finance wage growth. While skilled labor, compared to unskilled labor, predominantly drives finance wages, we also find that the finance sector contributes to income inequality by disproportionately affecting the market economy skill premium. Despite accounting for under a tenth of overall economic activity, finance offsets up to almost a third of declines in skilled-unskilled wage disparities nationally. Intensified intangible capital growth in the industry stands to exacerbate this trend. Finally, our study suggests that financial deregulation, globalization, banking competition, and domestic credit expansion positively affect finance relative to non-finance wages, while relative skilled labor supply increases and labor market rigidity impart negative effects. We obtain strong evidence that stricter labor market protection dampens the impact of banking competition.