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Finance Sector Wage Growth and the role of Human Capital

Author

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  • Joanne Lindley

    (Department of Management, Faculty of Social Science and Public Policy, King’s College)

  • Steven McIntosh

    () (Department of Economics, The University of Sheffield)

Abstract

Given the UK finance sector is one of the largest in the world, it provides the perfect setting for a study into the nature of the finance sector wage premium. We reveal the pervasiveness of this premium, across all sub-sectors of finance, and across all occupations within finance, and with the very highest rewards going to 40-49 year old men working in London. Moreover, the UK premium has continued to rise despite the recent financial crisis. Consequently, this study uses rich data from the UK to investigate potential explanations. We find that the financial sector is more skill intensive but also that financial sector workers have higher childhood test scores vis-à-vis non-finance workers. So we investigate to what extent these higher qualifications and higher cognitive skills can explain the financial pay differential. We then go on to consider whether the financial premium is a consequence of differences in job characteristics and thus whether technological change can explain the growth in the premium. While each of these factors has some role to play, we find that none can fully explain the wage premium found in the financial sector, which we find to be pervasive across 17 OECD countries, including the US. We therefore attribute to this to rent-sharing.

Suggested Citation

  • Joanne Lindley & Steven McIntosh, 2014. "Finance Sector Wage Growth and the role of Human Capital," Working Papers 2014002, The University of Sheffield, Department of Economics.
  • Handle: RePEc:shf:wpaper:2014002
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    File URL: http://www.shef.ac.uk/economics/research/serps/articles/2014_002.html
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    References listed on IDEAS

    as
    1. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 35-78.
    2. David H. Autor & Frank Levy & Richard J. Murnane, 2003. "The Skill Content of Recent Technological Change: An Empirical Exploration," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1279-1333.
    3. Paul Beaudry & Mark Doms & Ethan Lewis, 2010. "Should the Personal Computer Be Considered a Technological Revolution? Evidence from U.S. Metropolitan Areas," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 988-1036.
    4. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-858, December.
    5. Thomas Philippon & Ariell Reshef, 2012. "Wages and Human Capital in the U.S. Finance Industry: 1909--2006," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1551-1609.
    6. Joanne Lindley & Stephen Machin, 2012. "The Quest for More and More Education: Implications for Social Mobility," Fiscal Studies, Institute for Fiscal Studies, pages 265-286.
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    Cited by:

    1. repec:oup:ecpoli:v:32:y:2017:i:92:p:651-705. is not listed on IDEAS
    2. Swati Dhingra & Hanwei Huang & Gianmarco Ottaviano & João Paulo Pessoa & Thomas Sampson & John Van Reenen, 2017. "The costs and benefits of leaving the EU: trade effects," Economic Policy, CEPR;CES;MSH, vol. 32(92), pages 651-705.
    3. Böhm, Michael & Metzger, Daniel & Strömberg, Per, 2015. "Since you’re so rich, you must be really smart”: Talent and the Finance Wage Premium," Working Paper Series 313, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    wage inequality; financial services; cognitive skills; bonuses;

    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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