Since you re so rich, you must be really smart : Talent and the Finance Wage Premium

Transcription

1 Since you re so rich, you must be really smart : Talent and the Finance Wage Premium by Michael Böhm, Daniel Metzger and Per Strömberg Discussant: Giovanni Pica (Università degli Studi di Milano) 12 th joint ECB/CEPR Labour Market Workshop Wage developments in the aftermath of the crisis Frankfurt-am-Main, December 13-14, 2016

2 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males)

3 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males) PRELIMINARY EVIDENCE: finance premium increases in Sweden over the sample period (as in the U.S.)

4 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males) PRELIMINARY EVIDENCE: finance premium increases in Sweden over the sample period (as in the U.S.) RESEARCH QUESTION: how much of the (rising) finance premium can be ascribed to better allocation of TALENTS in the finance sector?

5 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males) PRELIMINARY EVIDENCE: finance premium increases in Sweden over the sample period (as in the U.S.) RESEARCH QUESTION: how much of the (rising) finance premium can be ascribed to better allocation of TALENTS in the finance sector? Three main RESULTS: Relative talent in the finance sector has NOT increased over time (neither on average nor at the top of the talent distribution)

6 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males) PRELIMINARY EVIDENCE: finance premium increases in Sweden over the sample period (as in the U.S.) RESEARCH QUESTION: how much of the (rising) finance premium can be ascribed to better allocation of TALENTS in the finance sector? Three main RESULTS: Relative talent in the finance sector has NOT increased over time (neither on average nor at the top of the talent distribution) The importance of talent in determining the likelihood of working in the finance sector does NOT increase over time

7 The paper Interesting paper exploiting very RICH data: linked employer-employee panel drawn from Swedish administrative records for the period include measures of cognitive and non-cognitive ABILITY (for males) PRELIMINARY EVIDENCE: finance premium increases in Sweden over the sample period (as in the U.S.) RESEARCH QUESTION: how much of the (rising) finance premium can be ascribed to better allocation of TALENTS in the finance sector? Three main RESULTS: Relative talent in the finance sector has NOT increased over time (neither on average nor at the top of the talent distribution) The importance of talent in determining the likelihood of working in the finance sector does NOT increase over time Talent explains (part of) the finance wage premium but it does NOT explain its rise

8 Theoretical channels DEMAND: Relative demand for high-talent individuals goes up, perhaps because the finance sector becomes more skill/talent-biased The availability of proxies for talent allows to investigate this channel (but little on this in the paper)

9 Theoretical channels DEMAND: Relative demand for high-talent individuals goes up, perhaps because the finance sector becomes more skill/talent-biased The availability of proxies for talent allows to investigate this channel (but little on this in the paper) SUPPLY: Rising relative wages induce high-talent workers to self-select into (supply their labour services to) the finance sector (focus of the paper) Testable implications from Roy model

10 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this?

11 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this? Roy model: w Fit = α Ft + β Ft s it (1) w Rit = α Rt + β Rt s it (2) w it = α Ft α Rt + (β Ft β Rt )s it (3) w it = α t + β ts it (4)

12 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this? Roy model: w Fit = α Ft + β Ft s it (1) w Rit = α Rt + β Rt s it (2) w it = α Ft α Rt + (β Ft β Rt )s it (3) w it = α t + β ts it (4) DEFINITION: finance is skill-biased IF β t > 0, i.e. return to skills are higher in the finance sector

13 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this? Roy model: w Fit = α Ft + β Ft s it (1) w Rit = α Rt + β Rt s it (2) w it = α Ft α Rt + (β Ft β Rt )s it (3) w it = α t + β ts it (4) DEFINITION: finance is skill-biased IF β t > 0, i.e. return to skills are higher in the finance sector α t measures the wage differential for the individual with s it = 0, i.e. for the average individual

14 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this? Roy model: w Fit = α Ft + β Ft s it (1) w Rit = α Rt + β Rt s it (2) w it = α Ft α Rt + (β Ft β Rt )s it (3) w it = α t + β ts it (4) DEFINITION: finance is skill-biased IF β t > 0, i.e. return to skills are higher in the finance sector α t measures the wage differential for the individual with s it = 0, i.e. for the average individual Marginal individual, ŝ it such that w it = 0: ŝ it = α t/ β t

15 Roy model (1) Main test: if the financial sector becomes MORE RELATIVELY SKILL-BIASED OVER TIME average RELATIVE TALENT is INCREASING OVER TIME Does the Roy model predicts this? ww iiii ww FFFFFF ww RRRRRR = αα tt + ββ tt ss iiii (3) Roy model: UU w Fit = α Ft + β iiii UU Ft s FFiiii UU RRRRRR = αα tt + ββ tt ss iiii + μμ tt + εε iiii (4) it (1) Illustration w Rit = 1 plots α Rt + these β Rt relative s it wages and utilities against workers skills for (2) the convenient w it = case α Ft of μμ tt =0. α Rt The + (β distribution Ft β Rt )s of it individual-specific relative preferences (3) indicated w it = by the α t two + β curves ts it around the relative wage line. The finance sector (4) is cho DEFINITION: finance is skill-biased worker s IF relative β t > utility 0, i.e. is return positive. tothe skills left panel are higher of Illustration in the1 finance shows the case in sector is relatively skill-biased as the relative wage line is upward-sloping (i.e., ββ tt >0) α t measures the wage differential workers for are the therefore individual (relatively) with s it = 0, i.e. for the average individual Marginal individual, ŝ it such that w it = 0: ŝ it = α t/ β more likely to enter the finance sector than are lowt If α t < 0, the marginal worker Illustration has above 1 average skills ŝ it > 0 (any evidence on this?)

16 re Roy (relatively) model more (2) likely to enter the finance sector than are low-skill workers. What happens if finance becomes increasingly skill-biased, i.e. β t goes up? reasing skill-bias in finance is captured by an increase of the relative ββ tt in ime. Our main interpretation of the rising skill-bias ββ tt is the one proposed by ef (2012), Cellerier and Vallee (2015), and others whereby the relative marginal reases in finance. An alternative interpretation could be that high-skill workers ively more effective at extracting rents from their employers in the financial se, relative potential wages in finance for high-skill workers rise compared to

17 re Roy (relatively) model more (2) likely to enter the finance sector than are low-skill workers. What happens if finance becomes increasingly skill-biased, i.e. β t goes up? reasing skill-bias in finance is captured by an increase of the relative ββ tt in If β t goes up ŝ it goes down (the opposite if α t > 0) ime. Our main interpretation of the rising skill-bias ββ tt is the one proposed by ef (2012), Cellerier and Vallee (2015), and others whereby the relative marginal reases in finance. An alternative interpretation could be that high-skill workers ively more effective at extracting rents from their employers in the financial se, relative potential wages in finance for high-skill workers rise compared to

18 re Roy (relatively) model more (2) likely to enter the finance sector than are low-skill workers. What happens if finance becomes increasingly skill-biased, i.e. β t goes up? reasing skill-bias in finance is captured by an increase of the relative ββ tt in If β t goes up ŝ it goes down (the opposite if α t > 0) ime. Our main interpretation of the rising skill-bias ββ tt is the one proposed by INFLOW of relatively LOW-TALENT workers into the financial sector: AVERAGE TALENT GOES ef (2012), DOWN Cellerier in the financial and Vallee sector (2015), (the and opposite others if whereby α t > 0) the relative marginal reases in finance. An alternative interpretation could be that high-skill workers ively more effective at extracting rents from their employers in the financial se, relative potential wages in finance for high-skill workers rise compared to

19 re Roy (relatively) model more (2) likely to enter the finance sector than are low-skill workers. What happens if finance becomes increasingly skill-biased, i.e. β t goes up? reasing skill-bias in finance is captured by an increase of the relative ββ tt in If β t goes up ŝ it goes down (the opposite if α t > 0) ime. Our main interpretation of the rising skill-bias ββ tt is the one proposed by INFLOW of relatively LOW-TALENT workers into the financial sector: AVERAGE TALENT GOES ef (2012), DOWN Cellerier in the financial and Vallee sector (2015), (the and opposite others if whereby α t > 0) the relative marginal reases in OUTFLOW finance. of An relatively alternative HIGH-TALENT interpretation workers could outbe ofthat the non high-skill financial workers sector: AVERAGE TALENT GOES DOWN in the non financial sector (the opposite if α t > 0) ively more effective at extracting rents from their employers in the financial se, relative potential wages in finance for high-skill workers rise compared to

20 re Roy (relatively) model more (2) likely to enter the finance sector than are low-skill workers. What happens if finance becomes increasingly skill-biased, i.e. β t goes up? reasing skill-bias in finance is captured by an increase of the relative ββ tt in If β t goes up ŝ it goes down (the opposite if α t > 0) ime. Our main interpretation of the rising skill-bias ββ tt is the one proposed by INFLOW of relatively LOW-TALENT workers into the financial sector: AVERAGE TALENT GOES ef (2012), DOWN Cellerier in the financial and Vallee sector (2015), (the and opposite others if whereby α t > 0) the relative marginal reases in OUTFLOW finance. of An relatively alternative HIGH-TALENT interpretation workers could outbe ofthat the non high-skill financial workers sector: AVERAGE TALENT GOES DOWN in the non financial sector (the opposite if α t > 0) ively more effective at extracting rents from their employers in the financial Net effect on average RELATIVE TALENT: AMBIGUOUS (for any α t) se, relative potential wages in finance for high-skill workers rise compared to

21 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME

22 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME With available data can estimate not only α t but also β t: i.e. can directly test whether finance is skill-biased and whether it becomes increasingly so.

23 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME With available data can estimate not only α t but also β t: i.e. can directly test whether finance is skill-biased and whether it becomes increasingly so. Additional, unambiguous prediction:

24 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME With available data can estimate not only α t but also β t: i.e. can directly test whether finance is skill-biased and whether it becomes increasingly so. Additional, unambiguous prediction: Talent of marginal individual go down if α t < 0

25 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME With available data can estimate not only α t but also β t: i.e. can directly test whether finance is skill-biased and whether it becomes increasingly so. Additional, unambiguous prediction: Talent of marginal individual go down if α t < 0 Talent of marginal individual go up if α t > 0

26 Roy model (3) If the financial sector becomes more relatively skill-biased over time the average RELATIVE TALENT does NOT necessarily INCREASE OVER TIME With available data can estimate not only α t but also β t: i.e. can directly test whether finance is skill-biased and whether it becomes increasingly so. Additional, unambiguous prediction: Talent of marginal individual go down if α t < 0 Talent of marginal individual go up if α t > 0 Can identify the marginal worker in the data and test whether the above predictions hold

27 Selection into finance Selection regressions (only on 30 year old individuals): cognitive ability interacted with a linear trend.

28 Selection into finance Selection regressions (only on 30 year old individuals): cognitive ability interacted with a linear trend. Saturate the model with (deciles of) cognitive ability interacted with

29 Selection into finance Selection regressions (only on 30 year old individuals): cognitive ability interacted with a linear trend. Saturate the model with (deciles of) cognitive ability interacted with year dummies

30 Selection into finance Selection regressions (only on 30 year old individuals): cognitive ability interacted with a linear trend. Saturate the model with (deciles of) cognitive ability interacted with year dummies (deciles of) education

31 Selection into finance Selection regressions (only on 30 year old individuals): cognitive ability interacted with a linear trend. Saturate the model with (deciles of) cognitive ability interacted with year dummies (deciles of) education (deciles of) education year dummies

32 Finance wage premium and returns to talent From individual wage regressions only show graphically average finance wage premium over time α t (with different sets of controls). Table with details.

33 Finance wage premium and returns to talent From individual wage regressions only show graphically average finance wage premium over time α t (with different sets of controls). Table with details. Returns to skill NOT SPECIFIC to the financial sector

34 Finance wage premium and returns to talent From individual wage regressions only show graphically average finance wage premium over time α t (with different sets of controls). Table with details. Returns to skill NOT SPECIFIC to the financial sector Should be both TIME-VARYING AND FINANCIAL SECTOR-SPECIFIC: estimate β t and can check whether finance is indeed skill biased

35 Finance wage premium and returns to talent From individual wage regressions only show graphically average finance wage premium over time α t (with different sets of controls). Table with details. Returns to skill NOT SPECIFIC to the financial sector Should be both TIME-VARYING AND FINANCIAL SECTOR-SPECIFIC: estimate β t and can check whether finance is indeed skill biased Enrich specification (saturate model with interaction between (deciles of) education and talent)

36 Finance wage premium and returns to talent From individual wage regressions only show graphically average finance wage premium over time α t (with different sets of controls). Table with details. Returns to skill NOT SPECIFIC to the financial sector Should be both TIME-VARYING AND FINANCIAL SECTOR-SPECIFIC: estimate β t and can check whether finance is indeed skill biased Enrich specification (saturate model with interaction between (deciles of) education and talent) Tasks (abstract vs routine): potentially interesting, very little details.

37 Relative demand for talent Did the RELATIVE DEMAND FOR TALENT increased in the finance sector relative to non finance sectors because the finance sector becomes more talent biased than the other sectors?

38 Relative demand for talent Did the RELATIVE DEMAND FOR TALENT increased in the finance sector relative to non finance sectors because the finance sector becomes more talent biased than the other sectors? Philippon and Reshef (2012) (using education) assume Y j,t = [α j (B j,t H j,t ) σ 1 σ + (1 α j )(A j,t L j,t ) σ 1 σ ] σ σ 1 where A and B are factor augmenting parameter for low- and high-talent workers.

39 Relative demand for talent Did the RELATIVE DEMAND FOR TALENT increased in the finance sector relative to non finance sectors because the finance sector becomes more talent biased than the other sectors? Philippon and Reshef (2012) (using education) assume Y j,t = [α j (B j,t H j,t ) σ 1 σ + (1 α j )(A j,t L j,t ) σ 1 σ ] σ σ 1 where A and B are factor augmenting parameter for low- and high-talent workers. The relative demand for talent in sector j is: h j,t = c j + (σ 1)µ j,t σπ t ( ( ) ( Hj,t Bj,t wh,t where h j,t = ln ), µ L j,t = ln and π j,t A t = ln ). An increase in µ j,t w j,t implies L,t TALENT-BIASED technical change.

40 Relative demand for talent Did the RELATIVE DEMAND FOR TALENT increased in the finance sector relative to non finance sectors because the finance sector becomes more talent biased than the other sectors? Philippon and Reshef (2012) (using education) assume Y j,t = [α j (B j,t H j,t ) σ 1 σ + (1 α j )(A j,t L j,t ) σ 1 σ ] σ σ 1 where A and B are factor augmenting parameter for low- and high-talent workers. The relative demand for talent in sector j is: h j,t = c j + (σ 1)µ j,t σπ t ( ( ) ( Hj,t Bj,t wh,t where h j,t = ln ), µ L j,t = ln and π j,t A t = ln ). An increase in µ j,t w j,t implies L,t TALENT-BIASED technical change. The relative demand for talent in finance vs non finance sectors is: h finance,t h non finance,t = c + (σ 1)(µ finance,t µ non finance,t ) Finance sector becomes increasingly skilled biased if µ finance,t µ non finance,t increases over time.