VoxEU Column Financial Regulation and Banking Poverty and Income Inequality

Big Bang financial deregulation and income inequality: Evidence from UK and Japan

Financial deregulation in the US has been shown to be associated with rising income inequality over the past four decades. This column looks at the income effects of financial deregulation in the UK and Japan during the 1980s and 1990s. As in the US, deregulation substantially increased the shares of income going to the very top of the distribution. These findings highlight the importance of financial markets in the evolution of income inequality in society. 

Over the past decades, top income shares have risen dramatically in many OECD countries. In Anglo-Saxon countries, the share of all incomes going to the top percentile roughly doubled between 1980 and 2010, while the increase has been less dramatic in other countries (Atkinson and Piketty 2007, 2010). Several explanations have been proposed, but it is fair to say that consensus has not been reached.

Confirming one part of the association between financial markets and top incomes, Kaplan and Rauh (2010) identify Wall Street top employees and partners of firms in the private equity, hedge fund, and venture capital businesses and find that they constitute a substantial share of the top 0.1% of income earners in the US in 2004. Bell and van Reenen (2010) found similar evidence for the UK, showing that 40% of those in the top percentile are working in the financial sector.

Financial deregulation and wages

A link between deregulation and finance sector wages is suggested by Philippon and Reshef (2012), who attribute most of the observed relative wage increases in the US since the 1970s to financial deregulations. The share of top decile income earners that were employed in the financial industry increased from about one hundredth in 1980 to about one tenth in 2009. This trend reflects the combined outcome of higher relative wages and an increase of the number of highly-remunerated finance workers. Philippon and Reshef (2013) find similar patterns in other countries and historical eras and Boustanifar et al. (2016) find, using cross-country regressions, that financial deregulation is the most important driver for relative wage and skill intensity of finance industry workers.

Financial deregulation may also raise wealth returns, offering another link to higher top incomes, since capital incomes are generally more important for top-income earners. However, there are few studies offering direct support of such effects on wealth returns. Several studies seem to suggest that deregulation raises overall market efficiency – for example, Jayaratne and Strahan (1996) who look at bank branching deregulation in the US, or Gerardi et al (2010) who consider the deregulation and securitisation in US credit markets in the early 1980s. However, Clemons and Weber (1990) find that the UK Big Bang deregulation was indeed followed by reduced transaction costs (lower trading fees and bid-ask spreads).

The Big Bangs of financial reform

In recent work, we test the joint effect of these two mechanisms (Tanndal and Waldenström 2016). The financial deregulations in focus here are the ‘Big Bangs’ in the UK in 1986 and in Japan in 1998-99. Overall, the Big Bangs distinguish themselves not only due to the level or speed of deregulations, but also because of political ambition – these policies sought to move the focus of world finance to their metropolis. The ambitions for the London and Tokyo stock exchanges clearly show that the intentions of these policies were not just to catch up with the international standard of financial markets; they were trying to stay on top (Bellringer and Michie 2014, Toya and Amyx 2006: 192).

Banking deregulation in the US facilitated case study research in a way these two reforms did not, which naturally has led to more research on the consequences in the US.1 By expanding the research to the British and Japanese financial markets, we hope to increase the generalisability of these findings.

The Big Bangs do not, however, have counterfactuals that are as obvious as the US states. We tackle this challenge by estimating synthetic control groups, using the method developed by Abadie et al. (2010). Using top income data from the World Wealth and Income Database and a set of other control variables we find a combination of other Anglo-Saxon countries to project the trend in the UK, and a mix of Western European countries for Japan.

Financial deregulation boosts top income shares

Our main finding is that, compared to these synthetic control groups, the income shares of top earners increased substantially in both the UK and Japan as a result of the Big Bangs. Five years after the deregulation, the effect on the top decile was an increase of 20% in the UK and 15% in Japan, whereas the top percentile increased by almost 30% in the UK compared to 10% in Japan, as shown in Figures 1 and 2.

Figure 1. Top income trends in the UK

Figure 2. Top income trends in Japan

The synthetic controls we are able to create from this dataset match the pre-treatment trends well for Japan, but somewhat less so for the UK, where two pre-treatment divergences occur a few years before the deregulation. Hence, the point estimate for the British top 10% and 5% income groups should be read conservatively. However, in a number of sensitivity checks – for example, using different control variables when selecting synthetic controls, running ‘placebo tests’ on non-treated countries, and examining post-treatment developments – we find that our main results are robust in all these dimensions.

We are able to do a more detailed study of where in the top distribution this increase occurs by splitting up the larger top income shares and re-calibrating synthetic controls for the specific populations between the 90th and 95th percentiles, the 95th to the 99th percentiles and the lower 9 thousandth of the top percentile in the income distribution. This specification, as shown in Figure 3, gives evidence of somewhat diverging patterns across the UK and Japan.

Figure 3. Differences in deregulation effects across top income groups

In the UK case, the deregulation impact documented for the top decile is accounted for almost totally by the top 5 percentiles, whereas the bottom half of the top decile did not change much. Splitting up the top 5, in turn, shows that the top percentile and the next 4 percentiles stand for almost equal amounts of the total income share rise. In Japan, both halves of the top decile benefit from deregulation, and the majority of the top 5 percentile’s increased share can be attributed to the group below the top percentile. In both countries, the top 0.1 percentile shows little or no increase, compared to the top percentile as a whole.

These patterns offer little support to models focusing on increased wealth returns to the super-rich, at least to the extent that most of these individuals are in the most exclusive top 0.1 percentile.

Concluding remarks

By this quasi-experimental evaluation of top income shares we are able to causally identify how top income shares were influenced by the Big Bangs of financial deregulations that occurred in the UK and Japan during the 1980s and 1990s. Our finding of an over 15% increase in the top decile earnings confirm that financial deregulation has a large impact on the aggregate share of top income earnings, also outside of the US. This emphasises the generality and scale of the results of Philippon and Reshef (2012, 2013) that earnings among financial sector employees are a crucial factor for income changes in the top end of the distribution.


Abadie, A, A Diamond and J Hainmueller (2010) "Synthetic control methods for comparative case studies: Estimating the effect of California's Tobacco Control Program", Journal of the American Statistical Association, 105(490): 493--505.

Atkinson, A B and T Piketty (Eds) (2007) Top incomes over the Twentieth Century: A contrast between continental European and English-speaking countries, Oxford, Oxford University Press.

Atkinson, A B and T Piketty (Eds) (2010) Top incomes: A global perspective, Oxford: Oxford University Press.

Beck, T, R Levine and A Levkov (2010) "Big bad banks? The winners and losers from bank deregulation in the United States", Journal of Finance, 65(5): 1637—1667.

Bell, B and J Van Reenen (2010) “Banker’s pay and extreme wage inequality in the UK”, Centre for Economic Performance special papers CEPSP21, Centre for Economic Performance, London School of Economics and Political Science, London, UK.

Bellringer, C and R Michie (2014) "Big bang in the city of London: An intentional revolution or an accident?", Financial History Review, 21(02): 111--137.

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Clemons, E K and B W Weber (1990) "London's Big Bang: A case study of information technology, competitive impact, and organizational change", Journal of Management Information Systems, 6(4): 41--60.

Gerardi, K S, H Rosen and P Willen (2010) "The impact of deregulation and financial innovation on consumers: The case of the mortgage market", Journal of Finance, 65(1): 333--360.

Greenwood, J and B Jovanovic (1990) "Financial development, growth, and the distribution of income", Journal of Political Economy, 98(5): 1076--1107.

Hubbard, R G and D Palia (1995) "Executive pay and performance evidence from the US banking industry", Journal of Financial Economics, 39(1): 105--130.

Jayarane, J and P Strahan (1996) “The finance-growth nexus: Evidence from bank branch deregulation”, Quarterly Journal of Economics, 111 (3): 639-670.

Kaplan, S N and J Rauh (2010) "Wall Street and Main Street: What contributes to the rise in the highest incomes?", Review of Financial Studies, 23(3): 1004--1050.

Philippon, T and A Reshef (2012) "Wages and human capital in the US finance industry: 1909--2006", Quarterly Journal of Economics, 127(4): 1551--1607.

Philippon, T and A Reshef (2013) "An international look at the growth of modern finance", Journal of Economic Perspectives, 27(2): 73--96.

Tanndal, J and D Waldenström (2016) “Does financial deregulation boost top incomes? Evidence from the Big Bang”, CEPR Discussion Paper No. 11094.

Toya, T and J A Amyx (2006) The political economy of the Japanese financial Big Bang: Institutional change in finance and public policymaking, New York: Oxford University Press.


[1] The difference in time of opening up states for interstate banking generated a neat natural experiment, utilized by for example Hubbard and Palia, 1995; Beck, Levine and Levkov, 2010; Philippon and Reshef, 2012.


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