Product Markets and Paychecks: Deregulation's Effect on the Compensation Structure in Banking

The author investigates how deregulation designed to promote competition in the commercial banking industry affected the compensation structure for banking employees. Using establishment-based data from the Employment Cost Index (ECI) Survey and, secondarily, Current Population Survey (CPS) data, she compares changes in the distribution of wages and benefits in the banking industry to changes in unaffected industries across states and over time. In the ECI, deregulation had no impact on overall compensation inequality in banking, but this concealed off-setting changes within the compensation structure. Manager wages fell while non-manager wages held steady, reducing between-occupation compensation inequality. In contrast, between-establishment inequality increased dramatically. Comparisons with CPS data reveal that including gender and educational controls modifies the declines in between-occupation inequality. Additionally, deregulation led to shifts in the types of non-wage benefits banking employees received, and increased between-establishment inequality is due to increased heterogeneity among small banking firms following deregulation.