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Overpaid bankers and income distribution
From Thomas Philippon and Ariell Reshef, I thought this was an important paper:
We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.
Here is a summary article on the piece and one of the lessons is that the future of the income inequality debate lies at the micro-micro level. The authors claim, by the way, that this 30 to 50 percent wage differential can be expected to disappear. Right now that looks like a pretty safe bet.
Posted by Tyler Cowen on January 24, 2009 at 04:50 AM in Economics | Permalink
Comments
Fascinating. One of the most interesting facts is kind of buried.
"Instead, they attribute it in part to strong demand for financial analysis at a time when technical revolutions were leading to an explosion of new stock offerings and loans to young and risky companies. Before 1930, that was the electrical revolution. More recently, it was information technology."
Quite apart from the interesting implications for financial salaries is the possibility that technological revolutions produce financial instability because of uncertainty. Is this a point that has been explored elsewhere? It deserves to be.
Posted by: Deborah at Jan 24, 2009 7:56:50 AM
Maybe I'm missing something, but doesn't the graph on the NY Times site show that the differential actually peaks during the 1930's and crashes down around the start of World War II?
Posted by: Foolish Jordan at Jan 24, 2009 8:27:24 AM
"Instead, they attribute it in part to strong demand for financial analysis at a time when technical revolutions were leading to an explosion of new stock offerings and loans to young and risky companies. Before 1930, that was the electrical revolution. More recently, it was information technology."
This does not explain why the pay differential was higher in the 1930's than in the 1920's and did not decline until WWII
Posted by: joan at Jan 24, 2009 8:30:14 AM
A simpler hypothesis: Bankers have more money for the same reason bakers have more cake - there's a lot of it lying around the shop. How much they consume will vary with the status-granting quality of money as a luxury good in and of itself, a quality which is subject to the vagaries of fashion. In the 60s and 70s, personal "high net worth" was not something people boasted of in public.
Posted by: Harkins at Jan 24, 2009 10:17:36 AM
"Quite apart from the interesting implications for financial salaries is the possibility that technological revolutions produce financial instability because of uncertainty. Is this a point that has been explored elsewhere? It deserves to be"
Yes, this was Schumpeter's theory of financial crises.
Posted by: assman at Jan 24, 2009 10:37:44 AM
haven't read the paper, but i wonder how they separate the demand side explanation from the supply side one: if increased rents made financial sector jobs more attractive, increased job competition would also have raised the average "skill" level of employees there...
Posted by: at Jan 24, 2009 6:25:05 PM
haven't read the paper, either, but I'm propose that we try making it illegal to pay anyone in the financial sector more than twice the minimum wage until year after the S&P 500 hits a new high.
This either works as revenge, or helps me get my retirement savings back. ;)
Posted by: zbicyclist at Jan 24, 2009 10:17:21 PM
When will someone do a similar analysis for the judicial/legal sector, and when can we expect that wage differential to disappear?
Posted by: anonymous at Jan 25, 2009 11:45:22 AM
