Relative finance wages and inequality: A role for intangibles?

We investigate the role of intangible capital in the growth of relative finance wages using (i) a production framework entailing multi-level nesting and (ii) reduced-form analysis. We find that the degree and effects of complementarity between skilled labor and intangible capital are much more pronounced in finance than in the rest of the market economy. The stronger positive effects of such complementarity on finance skill premia are reinforced by relatively stronger unskilled labor substitution possibilities and technical change in the sector. Despite accounting for under a tenth of overall economic activity, finance offsets up to almost a third of declines in skilled–unskilled wage disparities nationally. We thereby find that finance contributes inordinately to income inequality. Intensified intangible capital growth in the industry stands to exacerbate this trend. Finally, our study suggests that financial deregulation, globalization, banking competition, and domestic credit expansion positively affect relative finance wages. Stricter labor market protection meanwhile dampens the impact of banking competition. • Intangibles exhibit stronger synergies (substitutability) with skilled (unskilled) labor in finance than non-finance. • Relative finance wages rise with the sector’s relative intensity of intangibles. • Stronger technical change in finance reinforces growth in relative finance wages. • Finance contributes inordinately to inequality and intangibles promote this trend. • Employment protection dampens banking competition effects on relative finance wages.