External Labor Market Punishment in Finance

Abstract

We examine the extent of external labor market punishment for misconduct in finance and contrast the consequences for those in non-finance sectors. Using detailed proprietary data on individual job separations and income, we document that finance employees involuntarily separated for misconduct earn 2.8% to 8.6% higher income than similar employees laid-off for no fault of their own. These results are less likely to be explained by differences across workers involuntarily separated for misconduct versus no fault. They are driven by misconduct employees separated from firms with fewer fraud related consumer complaints (or more timely responses to complaints) but who get rehired by employers with higher levels of such complaints (or lower levels of timely responses). Our results are most consistent with assortative matching in the finance labor market where misconduct separation acts as an informative signal of certain characteristics for employers who value and pay a premium for such employees. Finance is unique in that these patterns are reversed for non-finance sectors, do not show up for any other sector in the economy, and are absent for workers employed in non-finance-related jobs within the finance sector.

Keywords: Misconduct, punishment, finance sector, layoffs, earnings, employer-employee match

JEL Classification: G20, H20, D10