Finance sector wages: explaining their high level and growth


In summary, the available evidence is most consistent with the rent sharing explanation for the finance sector pay premium. For this explanation to work, however, we also need it to explain why the premium is rising. This could be due to a rising opportunity to engage in rent sharing, due to financial deregulation, implicit insurance against risk through bank bailouts, and increasing complexity of financial products creating more asymmetric information, as well as increased incentives to aim for a larger share of rents due to falling top-end marginal tax rates. Whether governments want to enact policies to try to reduce the premium depends on whether they view it as a private sector matter with benign effects on the economy as a whole, or as having a distorting effect on the labour market, attracting the best workers away from potentially more socially useful jobs.