Market Power, Finance Wages and Inequality
64 Pages Posted: 27 Nov 2018 Last revised: 2 Dec 2020
Date Written: May 1, 2019
Increasing industry concentration has raised concerns that declining competition among firms for labor has led to slow wage growth. However, the financial sector has been an exception. I find that finance wages have increased by almost three times the increase in non-finance wages, despite similar trends in market concentration. Using administrative data from the U.S. Census, I construct measures of firm-specific market power and show that higher market power is associated with significantly higher wages in finance than in non-finance. I provide evidence that rent-sharing plays an essential role in driving the more pronounced effect of market power on finance wages for two reasons. First, financial firms with higher market power can extract relatively higher rents to share. Second, financial firms give a relatively higher share of rents to workers, especially high-skill workers, due to relatively higher worker bargaining power. As rents are disproportionally distributed to high-skill workers, financial firms with higher market power are associated with relatively higher within-firm inequality.
Keywords: market power, concentration, finance, wage premium, inequality
JEL Classification: J31, J42, L11, G2
Suggested Citation: Suggested Citation