Decomposing the Finance Wage Premium: Contributions of ICT and Risk

Abstract

Wages in the finance industry are on average higher compared to the rest of the economy. Two prominent explanations suggested for this finance wage premium are the positive correlation between risk-taking and wages, and industry differences inICT intensity. Using a comprehensive worker-firm panel for the Netherlands, we estimate wage models with additive worker and firm fixed-effects. Including firm fixed-effects corrects for an otherwise downward bias in the estimated finance wage premium. We then relate the cross-section of firm fixed-effects to a range of firm characteristics, and find that ICT investment, the average level of human capital at a firm and the complementarity of the two are the main drivers of the finance wage premium, while firm risk makes only a small contribution.

Keywords: finance wage premium, worker-firm panels, ICT, firm risk