Financial Innovation, Labor Markets, and Wage Inequality: Evidence from Instant Payment Systems

Abstract

A longstanding debate concerns how technological change affects wage inequality. While the conventional view suggests technological innovation increases inequality by favoring skilled workers, we show that certain financial technologies can reduce wage gaps by benefiting low-skilled workers. Using comprehensive data on the universe of employees, we study the impact of instant payment systems on wages and wage inequality in the context of Brazil's instant payment system, Pix. Our difference-in-differences design exploits variation in pre-existing mobile penetration across municipalities. We find that in areas with higher mobile penetration, small firms experience a 3% increase in average wages and medium-sized firms a 1% increase, with effects concentrated in cash-intensive sectors such as retail and services. These findings are robust to a triple difference-in-differences design comparing cash-intensive versus non-cash-intensive establishments within municipalities. The wage effects are most pronounced for workers with lower levels of education, leading to a 2 percentage point reduction in the college wage premium.  Evidence suggests the mechanism operates through increased small-business labor demand coupled with local market frictions. Our findings demonstrate that digital payment technologies can reduce wage inequality by increasing demand for low-skilled labor in small, cash-intensive businesses.