Annual Lecture 2017: "Since you're so rich, you must be really smart: Talent and the Finance Wage Premium" Professor Per Strömberg - IMD

Relative pay in the financial sector has experienced an extraordinary increase over the last few decades. A proposed explanation for this trend has been that the demand for skilled workers in finance has risen more than in other sectors. We use Swedish administrative data, which include detailed cognitive and non-cognitive test scores as well as performance in high-school and university, to examine the implications of this hypothesis for talent allocation and relative wages in the financial sector. Despite a significant increase in relative pay, we find no evidence that the selection of talent into finance increased or improved, neither on average nor at the top of the talent and wage distributions. A changing composition of talent or their returns cannot account for the surge in the finance wage premium. These findings alleviate concerns about a ‘brain drain’ into finance at the expense of other sectors, but they also suggest that rents in finance are high and largely unexplained. We end with some thoughts on what other explanations seem more versus less likely to explain the financial pay development.