Financial liberalization hurts non-financial sectors via a brain-drain effect & decreases labour productivity

This interesting (open access) paper “Finance as a Magnet for the Best and Brightest: Implications for the Real Economy” examines how the absorption of talent into the financial sector affects the real sectors in the economy.
Based on a sample of 13 countries observed over the period 1980-2005, Christiane Kneer (Tilburg University) shows that financial liberalization is associated with skill-upgrading in the financial sector and exploits variation in financial liberalization across countries and time, and differences in the needs for skilled labour across manufacturing industries to identify the effect of the absorption of talent into finance on real sector outcomes. The evidence suggests that employment of skilled individuals grows disproportionally slower in skill-intensive relative to less skill-intensive industries following financial reform. The paper also shows that financial liberalization decreases labour productivity, total factor productivity and value added growth disproportionally in industries which rely strongly on skilled labour. This is consistent with the idea that financial liberalization hurts non-financial sectors via a brain-drain effect. Among the different dimensions of financial liberalization, especially policies fostering the development of security markets account for this finding.

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