How Finance Hubs Fuel Income Inequality: A Global Study

The Hidden Cost of Financial Centers

Try to imagine the history of New York without Wall Street, or London without the City. It’s not easy. Hosting a country’s main financial markets shapes a city’s identity, raises its profile, and creates jobs. But there are trade-offs. By acting as a magnet for high-paying finance jobs and related professions, many financial cities suffer from particularly high levels of income inequality.

In fact, alongside globalisation and the clustering of highly skilled workers, our research has found that the presence of a financial market is a major driver of the growing concentration of top earners and earnings inequality in select cities.

In a study conducted by two dozen researchers, we examined top earnings in cities in 10 countries across Europe, North America, and Asia, analysing two decades of linked employer-employee data.

For every country studied, we compared two cities: the financial hub housing the main national markets and related industries, and a second, comparison city that is closest in terms of population, employment, and share of GDP. In the US, for instance, we compared New York to Los Angeles. In Spain, we compared Madrid to Barcelona, in Japan it was Tokyo and Osaka, in France, Paris and Lyon, the Netherlands, Amsterdam and Rotterdam, and so on.

We wanted to understand whether the earnings of the top 1% were increasing, whether higher earners were clustered in certain cities, and what role the finance sector plays in determining income inequality.

A Richer, More Concentrated Top 1%

Across all 10 countries, the earnings share of the top 1% (i.e., how much of the total income went to those one percenters) increased over time, growing by an average of 0.17% per year. Countries such as Denmark and Sweden experienced the smallest rises, while the US posted the largest.

That is the aggregate for top earners: already high incomes increasing year after year. Our findings are consistent with data documenting the global increase in income inequality. But where do these high-flyers live and work?

In all of the countries we studied, the highest earners nationwide were more concentrated in financial cities than in the second cities. In 1990, earnings in financial cities were on average 1.7 times more likely to be in the national top 1% than those in comparison cities. Nearly two decades later, they are 2.4 times more likely.

Financial hubs were consistently responsible for an outsized percentage of the income growth among very top earners. On average, financial cities accounted for 65% of the increase in their countries’ top 1% earnings shares. In France, Spain, and Sweden, financial cities accounted for more than 100% of the increase, meaning that earnings in other cities actually declined.

The growing gap between financial and comparison cities is mainly driven by the surge in earnings in the financial sector. We estimate that this sector accounts for 30% of the divergence between the two types of cities.

Centralised Economies

The research’s two-decade-long timeframe helps interpret the trend. In the 1990s, many finance firms distributed ballooning profits among their employees, pushing salaries skyward. As another of our studies has shown, even when banking profits took a hit – during the 2008 crisis and its aftermath, for instance – salaries remained high. This was even the case when countries enacted specific regulations like capping bonuses to curb salaries in the sector and discourage risk taking.

Broader national contexts – including overall income inequality levels and how centralised and diversified economies are – also make a difference. In countries such as Spain, Sweden, and Denmark, financial cities contributed substantially to relatively modest increases in overall top 1% earnings shares. In contrast, in Germany, the US, and Canada, financial cities played a smaller role in much larger aggregate increases in national top earnings.

Sweden, Norway, and Spain are generally more centralised economies than Germany, Canada, or the US, so their financial hubs naturally play a larger role. Additionally, in North America, finance’s wage-setting practices have spread to other sectors such as tech. Meanwhile, in Scandinavian countries, finance has remained a niche sector, with exceptionally high wages but limited spillover into other sectors.

Financialisation, Globalisation, and Skills

Some 75% of European Union citizens live in cities and urban areas, a figure set to rise to 78% by 2050. Around the world, cities are expanding. This makes it vital to understand what makes them the way they are.

Globalisation is often blamed for income inequality in cities because cities provide the high-paying professional infrastructure – the consultants and lawyers as well as the bankers – for global business. Our research shows that some of the cities with the largest surge in earnings concentration are places like Stockholm and Madrid – important European capitals but not centres of global commerce.

Another suggested cause for income inequality is that highly educated workers and productive firms cluster in amenities-rich cities. But our research carefully paired cities with similar amenities and skill levels. In every case, the financial city contributed disproportionately to top earnings, and the other did not.

It is therefore safe to say that the presence of a financial sector is the determining factor in income inequality. This finding has profound implications for the sorts of cities, and societies, we want to create.