I have been thinking for a while that I should post to this article by Thomas Philippon and Ariell Reshef, particularly in the light of Irish (and worldwide) discussion about top bankers’ salaries and bonuses. Now Paul Krugman has based his latest column on it. The original article is worth downloading, if only for their Figure 1, which shows the ratio of the average wage in the financial industry to the average wage in the non-farm private sector. Philippon and Reshef say:
Figure 1 shows the evolution of the relative wage..and relative education..over the 20th century. The pattern that emerges is U-shaped, and suggests three distinct periods. From 1909 to 1933 the financial sector was a high-education, high-wage industry. It had 17 percent points more educated workers relative to the private sector; these workers were paid at least 50% more than in the rest of the private sector, on average. A dramatic shift occurred during the 1930s. The financial sector started to lose its human capital and its high wage status. Most of the decline occurred by 1950, but continued until 1980. By that time, the relative wage in the financial sector was approximately the same as in the rest of the economy. From 1980 onwards another dramatic shift occurred. The financial sector became a high-skill high-wage industry again. In a striking reversal, its relative wage and education went back almost exactly to their levels of the 1930s
Thee authors find that rents accounted for 30-50% of the wage differentials observed in the 1990s (“In that sense, financiers are overpaid”), and observe that “the flow of talented individuals into law and financial services might not be entirely desirable, because social returns might be higher in other occupations”.