Wages in US Financial Sector

I have just read this NBER paper by Thomas Philippon and Ariell Reshef, which looks at wages and human capital in the US financial industry from 1909 to 2006.  A more recent edition of the paper can be found on Reshef's webpage. Their work identifies the following stylised facts:

First, the relative skill intensity and relative wages of the financial sector exhibit a U-shaped pattern from 1909 to 2006. 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.  Using micro data on occupations, we create indices to measure the complexity of the tasks performed by the financial industry. Using this index, we document a similar U-shaped pattern over the past century: financial jobs were relatively more complex and non-routine than non-financial jobs before 1930 and after 1980, but not in the middle of the sample.
Philippon and Reshef explain these stylised facts.  They find a close link between deregulation and human capital in the financial sector.  Regulation inhibits creativity and innovation.  Hence, the change in human capital and wage premium after the New Deal regulatory structure was imposed.  Deregulation stimulates creativity, and consequently increases the demand for skilled workers.

The most interesting finding of Philippon and Reshef is that the high compensation of employees in the financial sector from the mid-1990s onwards is an unsustainable equilibrium in the long-run.  Financiers are overpaid!  According to Philippon and Reshef, tighter regulation of the financial system will result in a flow of human capital out of the financial sector and lower wages in the financial sector.  However, the political and economic power of the financial sector is such that a reversal of the decades of deregulation is highly unlikely.  That means one thing: financiers will continue to earn high rents. Good news for finance students!


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