Abstract
•Above-market compensation in the financial sector is associated with the growth of top incomes and wage inequality in advanced economies.•We develop an analytical framework for comparing the distributional impact of the financial wage premium across advanced economies.•Top labor incomes in the financial sector labor are 21% – 60% greater than top incomes in non-financial sectors.•The financial wage premium substantially varies across advanced economies which is partially explained by cross-national differences in the development of financial markets.•Labor income inequalities between sectors and within the financial sector increased top wage inequality by an average of 9%.
Prior country case studies show substantial wage premiums in the financial sector contributes to growth of top incomes and wage inequality in a select group of advanced economies. However, while comparative studies show financialization exerts heterogenous effects on wage inequality across advanced economies, it is unclear whether the magnitude and location of financial wage premium in the distribution of income varies across advanced economies. We address this gap in the empirical literature by examining the financial wage premium across the labor income distributions of 13 advanced economies since the 1980s using harmonized labor force data from multiple waves of the Luxembourg Income Study. Consistent with prior studies, we find the financial wage premium is concentrated at the upper end of the income distribution in most advanced economies, but the magnitude of the premium substantially varies across these economies. We account for this variation by showing the market structure of financial systems exacerbates the financial wage premium at the upper end of the distribution. Overall, this study shows the financial wage premium is an important distributional mechanism for understanding the growth of top incomes and wage inequality in advanced economies and the marketization of financial activity amplifies the wage dynamics of financialization.