The Absorption of Talent into Finance: Evidence from U.S. Banking Deregulation

This paper exploits variation in U.S. branching deregulation to test whether the diversion of talent into banks and away from real sectors affects the labour productivity of manufacturing industries. I find that the relaxation of interstate branching restrictions disproportionately reduces the labour productivity of industries which are relatively skill-intensive. This suggests that the real sectors of the economy suffer from a brain drain induced by skill-upgrading of banks. On the other hand, I find that deregulation disproportionally increases the labour productivity of manufacturing industries that rely heavily on external funds. This result might partially be driven by skill-upgrading of banks. The overall effect of the reallocation of talent on labour productivity therefore depends on the specific skill and funding requirements of a sector. *I would like to thank Thorsten Beck, Fabio Braggion and Fabiana Penas, and seminar participants at Tilburg University and the Dutch Central Bank for useful comments and suggestions. I am grateful to Jill Hendrickson and Mark Nichols for sharing their data with me. Contact author: Christiane Kneer, De Nederlandsche Bank, Postbus 98, 1000 AB Amsterdam, e-mail: [email protected]