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Financial Development and Wage Inequality: Theory and Evidence

  • Jerzmanowski, Michal
  • Nabar, Malhar

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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File URL: http://mpra.ub.uni-muenchen.de/9841/1/MPRA_paper_9841.pdf
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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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  18. Aghion, Philippe & Howitt, Peter & Violante, Giovanni L, 2002. " General Purpose Technology and Wage Inequality," Journal of Economic Growth, Springer, vol. 7(4), pages 315-45, December.
  19. Sandra E. Black & Philip E. Strahan, 2002. "Entrepreneurship and Bank Credit Availability," Journal of Finance, American Finance Association, vol. 57(6), pages 2807-2833, December.
  20. Janet L. Yellen, 2006. "Economic inequality in the United States," Speech 28, Federal Reserve Bank of San Francisco.
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