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Wage Growth and Human Capital in the UK Finance Sector

Listed author(s):
  • Joanne Lindley

    (University of Surrey)

Despite the recent financial crisis the UK financial pay premium has continued to rise. To some extent this is a consequence of increased skill intensity in the finance sector, but this paper shows that finance workers have higher cognitive skills, on average, and this partly explains their higher wages. These are significant across all post-secondary education groups and not just those at the top. However, after controlling for unobserved heterogeneity we still find unexplainable rents to finance sector workers which are largely a consequence of bonuses. Though we also show that finance workers are more likely to be insecure about their job especially those that receive higher bonuses. In keeping with the existing literature on inequality we estimate demand and supply models to explain increasing inequality between finance workers vis-à-vis other workers. We find that finance workers are not perfect substitutes for non-finance workers in production, which is consistent with them having higher cognitive skills. Finally, we find relative demand shifts in favour of finance sector workers which are partially correlated with increased financial innovation and technical change, but most importantly we find that these demand shifts are slowing down.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0313.

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Length: 34 pages
Date of creation: Mar 2013
Handle: RePEc:sur:surrec:0313
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