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“Since you’re so rich, you must be really smart†: Talent and the Finance Wage Premium

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  • Strömberg, Per
  • Metzger, Daniel
  • Böhm, Michael

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.

Suggested Citation

  • Strömberg, Per & Metzger, Daniel & Böhm, Michael, 2018. "“Since you’re so rich, you must be really smart†: Talent and the Finance Wage Premium," CEPR Discussion Papers 12711, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12711
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    2. Didier Sornette & Spencer Wheatley & Peter Cauwels, 2019. "The fair reward problem: the illusion of success and how to solve it," Papers 1902.04940, arXiv.org, revised Apr 2019.
    3. Matthias Efing & Harald Hau & Patrick Kampkötter & Jean-Charles Rochet, 2023. "Bank Bonus Pay as a Risk Sharing Contract," The Review of Financial Studies, Society for Financial Studies, vol. 36(1), pages 235-280.
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    5. Saara Vaahtoniemi, 2021. "The finance wage premium: Finnish evidence from a gender perspective," LABOUR, CEIS, vol. 35(3), pages 412-431, September.
    6. Marin, Giovanni & Vona, Francesco, 2023. "Finance and the reallocation of scientific, engineering and mathematical talent," Research Policy, Elsevier, vol. 52(5).
    7. Holzmeister, Felix & Holmén, Martin & Kirchler, Michael & Stefan, Matthias & Wengström, Erik, 2019. "Delegated Decision-Making in Finance," OSF Preprints 3umdf, Center for Open Science.
    8. Kirill Shakhnov, 2022. "The Allocation of Talent: Finance versus Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 161-195, October.
    9. Matthias Stefan & Martin Holmén & Felix Holzmeister & Michael Kirchler & Erik Wengström, 2022. "You can’t always get what you want—An experiment on finance professionals' decisions for others," Working Papers 2022-02, Faculty of Economics and Statistics, Universität Innsbruck.
    10. Farago, Adam & Holmén, Martin & Holzmeister, Felix & Kirchler, Michael & Razen, Michael, 2019. "Cognitive Skills and Economic Preferences in the Fund Industry," OSF Preprints 964ba, Center for Open Science.
    11. repec:osf:osfxxx:3umdf_v1 is not listed on IDEAS
    12. Giovanni Gallipoli & Khalil Esmkhani & Michael Böhm, 2019. "Skill-Biased Firms and the Distribution of Labor Market Returns," 2019 Meeting Papers 1199, Society for Economic Dynamics.
    13. Martin Holmén & Felix Holzmeister & Michael Kirchler & Matthias Stefan & Erik Wengström, 2023. "Economic Preferences and Personality Traits Among Finance Professionals and the General Population," The Economic Journal, Royal Economic Society, vol. 133(656), pages 2949-2977.
    14. Adams, Renée B., 2021. "Trust in finance: Values matter," Journal of the Japanese and International Economies, Elsevier, vol. 60(C).
    15. Didier Sornette & Spencer Wheatley & Peter Cauwels, 2019. "The Fair Reward Problem: The Illusion Of Success And How To Solve It," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-52, May.

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    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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