Financial Development and Wage Inequality: Theory and Evidence

24 Pages Posted: 30 Nov 2012

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: January 2013

Abstract

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the United States 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 U.S. states following banking deregulation provides empirical support for our hypothesis. We find that wages of skilled workers increased by between 0.5% and 6.3% following deregulation while those of unskilled workers fell by between 3.5% and 8.7%. 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 4.2% and 1.7%, respectively.

JEL Classification: E25, J31, G24

Suggested Citation

Jerzmanowski, Michal and Nabar, Malhar, Financial Development and Wage Inequality: Theory and Evidence (January 2013). Economic Inquiry, Vol. 51, Issue 1, pp. 211-234, 2013, Available at SSRN: https://ssrn.com/abstract=2182954 or http://dx.doi.org/10.1111/j.1465-7295.2010.00341.x

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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