The Best and Brightest or Just Mediocre? A Quantitative Study about Wages and Talent in the Financial Sector in Denmark

Sina Smid

Student thesis: Master thesis

Abstract

Since the last decade, wages in the financial sector have risen drastically around the world. This has been attributed both to increasing financial deregulation in the 1980s, as well as to the growing importance of highly skilled labour in the financial service industry (Célérier and Vallée 2015; Philippon and Reshef 2012). As this skill-bias has been found to have sever implications for productivity in other parts of the economy, understanding its origins has increasingly been a focus in economic research (Baumol 1990; Murphy et al. 1991). This paper uses annual Danish administrative panel data from 1986 to 2013, provided by Statistics Denmark, in order to explain escalating wages in the financial sector. It challenges the proposed relationship between financial wages and talent, using the final high school GPA, in an extensive, multi-level model, primarily analysing dynamics in the aggregated financial sector, and secondly the differences in financial sub-branches and thirdly individual career choices. The major role that economic theory and previous researchers have attributed to individuals’ skills and talent level in explaining income inequality is the foundation for the focus of the thesis. The aggregated industry analysis presented within the thesis shows that wages of workers in the financial sector in Denmark relative to non-financial sectors increase to the same extent as in other financial markets in developed economies. Contrary to the proposed positive relationship, neither talent nor other human capital measurements account fully for the major increase in the finance wage premium; though the results do show a positively significant relationship. In addition, talent endowment was not found to increase the chances of individuals entering the finance industry. A high GPA was even found to have a negative influence on an individual’s choice to work in finance. However, years of education, measuring skills more broadly, have a positive influence. The intra-industry analysis revealed differences in terms of wage and talent allocations among industry groups and industry classes in the financial industry. The analysis also shows that not only high-paid sub-branches succeed in attracting the highest skilled financial employees. Finally, the findings show a significant loss of highly talented financial employees within the financial sector to other sectors of the economy, with this mostly taking place after only a short work period. In sum, this thesis shows that the Danish financial industry is not clearly subject to a “talent-bias”.

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages93
SupervisorsMorten Sørensen