The financialization of the US economy and rising inequality are two of the most profound developments in the US over the past four decades. I study their connections.
Income Dynamics, Economic Rents, and the Financialization of the US Economy
(with Donald Tomaskovic-Devey)
The 2008 collapse of the world financial system, while proximately linked to the housing bubble and risk-laden mortgage backed securities, was a consequence of the financialization of the U.S. economy since the 1970s. This article examines the institutional and income dynamics associated with the financialization of the U.S. economy, advancing a sociological explanation of income shifts into the finance sector. Complementary developments include banking deregulation, finance industry concentration, increased size and scope of institutional investors, the shareholder value movement, and dominance of the neoliberal policy model. As a result, we estimate that between 5.8 and 6.6 trillion dollars were transferred to the finance sector since 1980. We conclude that understanding inequality dynamics requires attention to market institutions and politics.
Financialization and US Income Inequality, 1970-2008
(with Donald Tomaskovic-Devey)
Focusing on U.S. nonfinance industries, we examine the connection between financialization and rising income inequality. We argue that the increasing reliance on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners’ and elite workers’ negotiating power relative to other workers. The result was an incremental exclusion of the general workforce from revenue-generating and compensation-setting processes. Using time-series cross-section data at the industry level, we find that increasing dependence on financial income, in the long run, is associated with reducing labor’s share of income, increasing top executives’ share of compensation, and increasing earnings dispersion among workers. Net of conventional explanations such as deunionization, globalization, technological change, and capital investment, the effects of financialization on all three dimensions of income inequality are substantial. Our counterfactual analysis suggests that financialization could account for more than half of the decline in labor’s share of income, 9.6% of the growth in officers’ share of compensation, and 10.2% of the growth in earnings dispersion between 1970 and 2008
The Rise of Finance and Firm Employment Dynamics
This article investigates the organizational links between the rise of finance and employment. I argue that the rise of finance increased the transfer of resources from productive activities to financial markets and marginalized the role of labor in the revenue generating and distributing processes, which in turn led to weaker employment growth. This broader process operates through at least three organizational processes: 1) firms' increasing operation in banking, trading, and other financial activities depresses investment in the workforce; 2) the expansion of corporate debt imposes constraints on employment growth; and 3) the growing rewards for shareholders further diverts resources away from workers. Importantly, the employment impacts are uneven within firms. Production and service workers are more vulnerable to shifts associated with the rise of finance than managers and professionals.
The Financial Premium in the US Labor Market: A Distributional Analysis
Using both cross-sectional and panel data, this article revisits the evolution of the financial premium between 1970 and 2011 with a distributional approach. I report that above-market compensation was present in the finance sector in the 1970s, but concentrated mostly at the bottom of the earnings distribution. The financial premium observed since the 1980s, however, is largely driven by excessive compensation at the top, a development that increasingly contributes to the national concentration of earnings. Furthermore, the analysis suggests that the financial premium for top earners remained robust in the 2000s, when deregulation slowed down, and in the aftermath of the recent financial meltdown. These findings are inconsistent with the account that the earnings differential is driven by unobserved skill difference and demand shocks but supportive of the institutional account of rising inequality.
Gender, Parental Status, and Financial Premium
(with Megan Tobias Neely)
Previous research documents an exponential growth in wage premium for elite financial workers since the 1980s. In the meantime, qualitative studies find substantial gender disparities in high finance in terms of earnings and career mobility. Yet, little is known about how these gender disparities compare to their non-elite or non-financial counterparts or how they vary across ethnic-racial groups. This article examines how the wage premium for working in finance varies along the lines of gender and parental status across the wage distribution. We report that women earn a greater wage premium than men for holding low-wage financial jobs, while almost all of the increase in financial premium at the upper end is captured by elite male workers, particularly fathers. Similar gender dynamics are found across racial and ethnic groups. However, white men tend to receive a greater premium than black and Hispanic men at the upper end, while black and Hispanic women gain a larger advantage than their white counterparts. We discuss the potential mechanisms driving the gendered and racialized divergences, and the implications of these findings for the growing income inequality in the United States.
Did Financialization Reduce Economic Growth?
(with Donald Tomaskovic-Devey and Nathan Meyers)
We explore the consequences of increased financial investment by non-financial firms, finding consistent evidence that financialization in the non-finance sector reduced economic growth in that sector. Employing an expanded conceptualization of value added which identifies internal (capital, labour) and external (creditors, government, charities) stakeholders with claims on the value generated in production and exchange, we find that the declining value added produced by financialization was born most strikingly by labour and the state, while increasing value was channelled to corporate debt and equity holders. Corporate charities also had a net gain associated with increased financial investments by the non-financial firms.
Financialization: Causes, Inequality Consequences, and Policy Implications
(with Donald Tomaskovic-Devey)
The US is now a financialized economy, where finance principles, investments, and firms have become increasingly dominant in all aspects of the economy. Financialization is a process of income redistribution with two faces. The first face is one of rent seeking by an increasingly concentrated and politically influential finance sector. This rent seeking has been successful, leading to the pooling of profits and income in the finance sector. The second face is a shift in behavior of non-finance firms away from production and service production and toward financial investments and services. This shift has had both strategic and normative components and has reduced the bargaining power of labor and the centrality of production. As a consequence financialization of the non-finance sector has led to lower employment, income transfers to executives and capital owners, and increased inequality among workers. We discuss the policy implications of these findings at the end of this paper.