Financial Development and Wage Inequality: Theory and Evidence
Year: 2011
Type: article
Abstract: 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.
Source: Economic Inquiry
Authors: MICHAL JERZMANOWSKI, MALHAR NABAR
Institutions: Clemson University, Wellesley College
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1520024700