We live in an era of financialization. Since 1980, capital markets have expanded around the world; capital shuttles the global instantaneously. Shareholder concerns drive executive decision making and compensation, while the fluctuations of stock markets are a source of public anxiety. So are the financial scandals that have regularly occurred in recent years: junk bonds in the 1980s; lax accounting and stock manipulation in the early 2000s; and debt securitization today. We also live in an era of rising income inequality and employment risk. The gaps between top and bottom incomes and between top and middle incomes have widened since 1980. Greater risk takes various forms, such as wage and employment volatility and the shift from employers to employees of responsibility for pensions and, in the United States, for health insurance. There is an enormous literature on financial development and another on inequality. But relatively few studies consider the intersection of these phenomena. Standard explanations for rising inequality--skill-biased technological change and trade--account for only 30% of the variation in aggregate inequality. What else matters? We argue here that an omitted factor is financial development. This study explores the relationship between financial markets and labor markets along three dimensions: contemporary, historical, and comparative. For the world’s industrialized nations, we find that financial development waxes and wanes in line with top income shares. Since 1980, however, there have been national divergences between financial development--defined here as the economic prominence of equity and credit markets--and inequality. In the U.S. and U.K., there remains a strong positive correlation but in other parts of Europe and in Japan the relationship is weaker.
Source: Institute for Research on Labor and Employment. Paper Jacoby01.
http://repositories.cdlib.org/uclairle/Jacoby01
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