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”.
2 replies on “More comparisons with the 1930s”
The point that the financial services industry has grown too large in terms of profit and salary shares (also in terms market values of the financial services industry equity) is certainly valid. The shrinkage of the industry (by all three measures: profits, incomes, and market values) is one of the best side-effects of the current crisis. I am not sure that this 3-date point historical comparison is decisive evidence. Other industries such as IT and candle-making have grown and collapsed spectacularly as a proportion of the economy and it means exactly nothing. So the historical evidence is very interesting but not decisive really. Examining the current environment in terms of industrial structure and the drain of human capital and other resources the shrinkage of the financial services industry definitely is to be welcomed.
Economic historians … rock on! … it gives some useful insights but not the whole picture.
All of this was useful to predict what has happened but was not used except by those derided as “fringe”. Their forecasts were sound and by not using them the regulators have allowed continued over investment into a bubble, which money was bound to be lost.
Instead we got the drivel about the new paradigm etc.
Even now the USA is not saying where their taxpayer funds are being directed “to save the economy”. Everyone with a brain knows that the entire system is insolvent, but by delaying formal settlements by liquidation etc, the truly stupid waste yet more investments into a market which is severely hampered.
Oh well, no one is to blame…….. let us just watch it happen. It might even be fun!