Overpaid bankers and income distribution

by on January 24, 2009 at 4:50 am in Economics | Permalink

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.

Deborah January 24, 2009 at 7:56 am

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.

joan January 24, 2009 at 8:30 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

assman January 24, 2009 at 10:37 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.

zbicyclist January 24, 2009 at 10:17 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. ;)

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