The Effects of Financial Deregulation on Wage Inequality

Job Market Paper 


This paper investigates how financial deregulation affects wage inequality and how the shift within the finance industry transmits into the labor market, both empirically and theoretically. I utilize staggered implementations of the interstate branching deregulation across US states from 1994 to 2005 as quasi-natural experiments. I find that this financial deregulation increases wage inequality. The increase effect is persistent over time and heterogeneous across dimensions of deregulation. I empirically show the transmission mechanism of the “finance facilitator”: financial deregulation facilitates (preexisting but financially constrained) skill-biased technical change in the labor market. First, within the finance industry, financial deregulation partially substitutes local community banks with national banks, which provide cheaper and more credit. Then, this positive credit supply shock loosens firms’ financial constraints, more for the firms that are young, small, or more profitable. Finally, these previously financially constrained firms scale up by hiring more skilled than unskilled workers. This further shifts skill composition and wage distribution of the labor market, resulting in higher wage inequality. To illustrate the mechanism theoretically, I endogenize financial constraints and capital-skill complementarity within a span-of-control model. I show that financial deregulation enables previously financially constrained firms to shift towards their optimal production scales and thus towards higher relative demand for skilled workers. Such a shift increases both relative wages and relative
employment of skilled workers and consequently drives up inequality.

Heterogeneous Labor Market Effects Across Financial Deregulations, Work in Progress

Does Finance Industry Benefit More From Financial Deregulation, Work in Progress

Good Finance, Bad Finance: Dispersed Information with Trembling Mistakes, Working Paper