Big Bad Banks? The Impact of U.S. Branch Deregulation on Income Distribution

By studying intrastate branch banking reform in the United States, this paper provides evidence that financial markets substantively influence the distribution of income. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved efficiency. Exploiting the cross-state, cross-time variation in the timing of bank deregulation, we evaluate the impact of liberalizing intrastate branching restrictions on the distribution of income. We find that branch deregulation significantly reduced income inequality by boosting the incomes of lower income workers. The reduction in income inequality is fully accounted for by a reduction in earnings inequality among salaried workers.

Big bad banks ? the impact of U.S. branch deregulation on income distribution

Policymakers and economists disagree about the impact of bank regulations on the distribution of income. Exploiting cross-state and cross-time variation, the authors test whether liberalizing restrictions on intra-state branching in the United States intensified, ameliorated, or had no effect on income distribution. The analysis finds that branch deregulation lowered income inequality by affecting labor market conditions, not by boosting the business income of the poor, nor by enhancing educational attainment. Reductions in the earnings gap between men and women and between skilled and unskilled workers account for the bulk of the explained drop in income inequality.Emerging Markets,Economic Theory&Research,Inequality,,Fiscal&Monetary Policy

Racial Discrimination and Competition

We provide the first assessment of whether an intensification of product market competition reduces the racial wage gap exactly where taste-based theories predict that competition will reduce labor market discrimination. in economies where employers have strong racial prejudices. We use bank deregulation across the U.S. states to identify an intensification of competition among banks, which in turn lowered entry barriers facing nonfinancial firms, especially firms that depend heavily on bank credit. Consistent with taste-based theories, we find that competition boosted blacks' relative residual wages within the banking industry and bank-dependent industries, but only in states with strong tastes for discrimination.Discrimination, imperfect competition, banks, regulation

Racial discrimination and competition

We provide the first assessment of whether an intensification of product market competition reduces the racial wage gap exactly where taste-based theories predict that competition will reduce labor market discrimination. in economies where employers have strong racial prejudices. We use bank deregulation across the U.S. states to identify an intensification of competition among banks, which in turn lowered entry barriers facing nonfinancial firms, especially firms that depend heavily on bank credit. Consistent with taste-based theories, we find that competition boosted blacks’ relative residual wages within the banking industry and bank-dependent industries, but only in states with strong tastes for discrimination

Racial Discrimination and Competition

This paper assesses the impact of competition on racial discrimination. The dismantling of inter- and intrastate bank restrictions by U.S. states from the mid-1970s to the mid-1990s reduced financial market imperfections, lowered entry barriers facing nonfinancial firms, and boosted the rate of new firm formation. We use bank deregulation to identify an exogenous intensification of competition in the nonfinancial sector, and evaluate its impact on the racial wage gap, which is that component of the black-white wage differential unexplained by Mincerian characteristics. We find that bank deregulation reduced the racial wage gap by spurring the entry of non- financial firms. Consistent with taste-based theories, competition reduced both the racial wage gap and racial segregation in the workplace, particularly in states with a comparatively high degree of racial prejudice, where competition-enhancing bank deregulation eliminated about one-quarter of the racial wage gap after five years.

The interplay between financial and labor markets

The three chapters of the dissertation illustrate the interplay between financial and labor markets. The chapters examine how removal of geographical restrictions on bank branching in the United States between 1960 and 1999 affected union membership, distribution of income, and black-white wage differential in the non-banking sectors. In the first chapter of the dissertation I use bank branch deregulation as an instrumental variable to identify an exogenous increase in the competitiveness of the non-financial sector and evaluate its impact on union membership. The results indicate that by making the economy more competitive, branch deregulation has a first-order negative impact on union membership in the non-banking sectors. The second chapter of the dissertation is a joint work with Thorsten Beck from Tilburg University and Ross Levine from Brown University. In this chapter we find that bank branch deregulation materially tightened the distribution of income in the United States by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Our findings are explained by rising relative wage rates and working hours of unskilled workers following bank deregulation. The third chapter of the dissertation is a joint work with Ross Levine and Yona Rubinstein, both from Brown University. Here we use bank branch deregulation as an instrumental variable to identify an exogenous increase in the competitiveness of the non-financial sector and evaluate its impact on black-white wage differential in the entire U.S. economy. We find that bank deregulation reduced the racial wage gap by spurring the entry of nonfinancial firms. Consistent with taste-based theories, competition reduced both the racial wage gap and racial segregation in the workplace, particularly in states with a comparatively high degree of racial prejudice. The dissertation relates to an emerging literature that examines the channels underlying the “finance-growth nexus” and advertises the role of labor markets in driving this relationship

Branching of banks and union decline

This paper proposes a novel explanation for the decline in unions in the United States since the late 1970s: state-by-state removal of geographical restrictions on branching of banks. Bank branch deregulation reduces union membership in the non-banking sectors by intensifying entry of new firms, especially in sectors with high dependence on external finance. New firm entry, in turn, is associated with a reduction in union wage premium, and subsequently leads to adverse union voting. I provide empirical evidence for these channels using repeated cross-sectional and panel data of U.S. workers and union representation election outcomes.Branch banks ; Labor unions

Bank Deregulation and Racial Inequality in America

ABSTRACT We use the cross-state, cross-time variation in bank deregulation across the U.S. states to assess how improvements in banking systems affected the labor market opportunities of black workers. Bank deregulation from the 1970s through the 1990s improved bank efficiency, lowered entry barriers facing nonfinancial firms, and intensified competition for labor throughout the economy. Consistent with Becker's (1957) theory of racial discrimination, we find that in economies where employers have sufficiently strong racial biases, deregulation-induced improvements in the banking system boosted black workers' relative wages by facilitating the entry of new firms and reducing the manifestation of racial prejudices in labor markets