The Real Effects of Banking the Poor : Evidence from Brazil

We study how financial development affects economic development and wage inequality. We use a large expansion of government-owned banks into Brazilian cities with low bank branch coverage and combine it with data on the universe of employees from 2000-2014. We find that higher financial development fosters firm growth, higher labor demand, and higher average wages, especially for cities initially in banking deserts. However, these gains are not shared equally. Instead, they increase with workers' productivity, implying a substantial increase in wage inequality. The changes to inequality are concentrated in cities where the initial supply of skilled workers is low, indicating that talent scarcity can drive how financial development affects inequality. Our results are inconsistent with alternative explanations such as differential exposure to Brazil's economic boom, an overall increase in government lending, and other government or social welfare programs. These results motivate embedding skill heterogeneity into macro-finance development models in order to capture these distributional consequences