DP12711 "Since you're so rich, you must be really smart": Talent and the Finance Wage Premium

Author(s): Michael Böhm, Daniel Metzger, Per Johan Strömberg
Publication Date: February 2018
Keyword(s): Sectoral Wage Premia; Talent Allocation; Earnings Inequality; Compensation in Financial Industry
JEL(s): G20, J24, J31
Programme Areas: Labour Economics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12711

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.