The Absorption of Talent into Finance: Evidence from U.S. Banking Deregulation

Abstract

The U.S. banking sector has grown substantially since the 1970s and has become more skill-intensive over time. This paper exploits variation in banking deregulation across U.S. states between 1997 and 2008 to test whether the banking sector absorbs talent at the expense of the real sectors in the economy. I find that the relaxation of interstate branching restrictions disproportionately reduces the labour productivity of skill-intensive manufacturing industries. This result also holds if changes in bank lending following deregulation are controlled for. My findings suggest that banking deregulation increases the demand for skilled labour of banks. The diversion of skilled individuals into banks and away from real sectors leads to labour productivity declines especially in those industries which rely heavily on skilled labour.