Modeling, Analytics and Business Intelligence

Bankers Paid too Much

Posted in Economy by Sanjay Bapna on February 4, 2009

Thomas Phillipon and Ariell Resheff study of the employment and wage trends in the financial sector.  Their findings are

From 1909 to 1933 the financial sector was a high skill, high wage industry. A dramatic shift occurred during the 1930s: the financial sector rapidly lost its high human capital and its wage premium relative to the rest of the private sector. The decline continued at a more moderate pace from 1950 to 1980. By that time, wages in the financial sector were similar, on average, to wages in the rest of the economy. From 1980 onward, another dramatic shift occurred. The financial sector became once again a high skill/high wage industry. Strikingly, by the end of the sample, relative wages and relative education levels went back almost exactly to their pre-1930s levels.

This was attributed to:

Highly skilled labour left the financial sector in the wake of Depression era regulations, and started flowing back precisely when these regulations were removed…. regulation inhibits the ability to exploit the creativity and innovation of educated and skilled workers. Deregulation unleashes creativity and innovation and increases demand for skilled workers. … however, the compensation of employees in the financial industry appears to be too high to be consistent with a sustainable labour-market equilibrium….Overall, we conclude that bankers were paid about 40% too much in 2006.

We are clearly following the same path (limits to wages of those who seek bailout money, and more regulation). Adios to Banking jobs for the next 6-7 decades.  Adios to innovation in the financial sector. So, in the coming decades, which fields will the best and the brightest students pursue? Technology comes to my mind, which is unregulated and requires the skills of a highly educated work force.

Relative Wage and Education in the Financial Occupations

Relative Wage and Education in the Financial Occupations

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