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

Financial sector wages increased extraordinarily over the last decades. An explanation for this trend is that skill demand rose more in finance than other sectors. We use Swedish administrative data, which include cognitive and non-cognitive ability, as well as U.S. data, to examine talent allocation and relative wages in the financial sector. We find no evidence that talent in finance improved, neither on average nor at the top. In contrast, our estimates of rent-sharing at the individual-firm level together with rising aggregate value added in finance can explain a substantial fraction of the increase in the finance wage premium. We argue that the lack of a labor market response can be partly explained by the back-loaded nature of pay and the importance of networks to enter finance. Our findings alleviate concerns about a brain drain but highlight labor market imperfections that can let a whole sector decouple from the rest of the economy.