The Real Effects of Banking the Poor: Evidence from Brazil

Adrien Matray and Julia Fonseca

No 16798, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a large expansion of government-owned banks in cities with extremely low bank branch coverage and data on the universe of formal-sector employees in Brazil over 2000-2014 to study how financial development affects economic development and wage inequality. We find that higher financial development fosters firm creation and firm expansion, which increases labor demand and leads to higher average wages, especially for cities initially located in banking deserts. The gains produced by higher financial development are not shared equally, but instead monotonically increase with workers’ productivity, which leads to a substantial increase in inequality. This increase is concentrated in cities where the initial supply of skilled workers is low, showing that talent scarcity is an important driver of how financial development affects inequality.

Date: 2021-12
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