Financial Development and Wage Inequality: Theory and Evidence

Michal Jerzmanowski and Malhar Nabar

MPRA Paper from University Library of Munich, Germany

Abstract: We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the US 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 US states following banking deregulation provides empirical support for our hypothesis. We find that wages of college educated workers increased by between 0.5 - 1.2% following deregulation while those of workers with a high school diploma fell by about 2.2%. 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 4.5% and 1.8%, respectively.

Keywords: Skill Premium; Residual Wage Inequality; Financial Deregulation (search for similar items in EconPapers)
JEL-codes: E25 G24 J31 (search for similar items in EconPapers)
Date: 2008-10-08
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: FINANCIAL DEVELOPMENT AND WAGE INEQUALITY: THEORY AND EVIDENCE (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9841

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