Wenting Ma

Job market paper

Market Power, Finance Wages and Inequality

Increasing industry concentration has raised concerns that declining competition among firms for labor has led to slow wage growth. However, the financial sector has been an exception. I find that finance wages have increased by almost three times the increase in non-finance wages, despite similar trends in market concentration. Using confidential U.S. Census data, I construct measures of firm-specific market power and show that finance firms with higher market power are associated with relatively higher wages as compared to firms in other sectors. I provide evidence that rent-sharing plays an essential role in driving the more pronounced effect of market power on finance wages for two reasons. First, finance firms with higher market power can extract relatively higher rents to share. Second, finance firms give a relatively higher share of rents to workers, especially high-skill ones, due to relatively higher worker bargaining power. As rents are disproportionally distributed to high-skilled workers, finance firms with higher market power are associated with relatively higher within-firm inequality.