Financial Development and Wage Inequality: Theory and Evidence

46 Pages Posted: 8 Oct 2008

See all articles by Michal Jerzmanowski

Michal Jerzmanowski

Clemson University - John E. Walker Department of Economics

Malhar Nabar

Wellesley College

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2008

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.

Keywords: Skill Premium, Residual Wage Inequality, Financial Deregulation

JEL Classification: E25, J31, G24

Suggested Citation

Jerzmanowski, Michal and Nabar, Malhar, Financial Development and Wage Inequality: Theory and Evidence (October 3, 2008). Available at SSRN: https://ssrn.com/abstract=1280978 or http://dx.doi.org/10.2139/ssrn.1280978

Michal Jerzmanowski (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

Malhar Nabar

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

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