Financialization and U.S. Income Inequality, 1970–2008

Abstract

Focusing on U.S. nonfinance industries, we examine the connectionbetween financialization and rising income inequality. We argue thatthe increasing reliance on earnings realized through financial channelsdecoupled the generation of surplus from production, strengtheningowners’ and elite workers’ negotiating power relative to other workers.The result was an incremental exclusion of the general workforce fromrevenue-generating and compensation-setting processes. Using timeseriescross-section data at the industry level, we find that increasingdependence on financial income, in the long run, is associated with reducinglabor’s share of income, increasing top executives’ share of compensation,and increasing earnings dispersion among workers. Netof conventional explanations such as deunionization, globalization,technological change, and capital investment, the effects of financializationon all three dimensions of income inequality are substantial.Our counterfactual analysis suggests that financialization couldaccount 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 thegrowth in earnings dispersion between 1970 and 2008.