The explosion of rewards in finance: a reward for talent? | At the edge | Martin Anota

In the financial sector, wages have exploded over the past four decades (see chart). For example, in the United States in the mid-1980s, financial workers earned 1.1 times more than other private sector workers; in 2014, they earned 1.7 times more than the latter [Böhm et alii, 2022]. The increase in financial wages also explains much of the increase in high incomes in several countries, including France. [Godechot, 2011]. Obviously, the expansion of finance, at least because of this bias, is one of the vectors of income inequality that has been observed in developed countries since the 1980s. (1).

SCHEDULE Relative wages in the US and Swedish financial sectors

Relative wages in the US and Swedish financial sectors

Source: Bohm etc (2022)

How to explain the explosion of salaries in finance?

In neoclassical logic, when the labor market is completely competitive, wages should reflect the marginal productivity of workers. From this point of view, the increase in wages in finance can be explained by the increased efficiency of financial workers compared to other employees. Some observations by Thomas Philippon and Ariel Rechef (2012) point to this trend: in the United States, the deregulation movement of the 1980s was accompanied by increasing labor complexity, demand for skilled labor, and skills in the financial sector, and the latter in GDP grew in parallel. In other words, if the tasks to be performed became more difficult, the financial sector would hire a more skilled workforce; if the productivity of workers then increased, their remuneration would naturally increase.

But in reality, markets are not completely competitive. The increase in wages in finance can also be explained by the increase in rents received by financial workers. Indeed, the most profitable companies tend to pay higher wages to their employees, so these firms tend to have a larger wage spread than others. [Card et alii, 2018]. However, studying the American case, Filippon and Reshef (2012) note that profits in finance grew faster than in the rest of the economy. According to their estimates, rents can explain between 30% and 50% of the wage gap between the financial sector and the rest of the private sector. In a later study, they came to a similar conclusion by observing other countries [Philippon et Reshef, 2013].

Some factors also cast doubt on the fact that financial workers have become more efficient. Thomas Filipon (2015) noted that the unit cost of financial services has not declined in recent decades, indicating that productivity in the financial sector has not increased over this period. And the fact that wages in this sector have hardly fallen since the 2008 global financial crisis is a clear indication of the possible gap between private income and social income within it.

Poor talent distribution?

Whatever the explanation for the increase in financial remuneration, if it is worrying, it is, in part, because it is likely to lead to a brain drain: seeking to obtain remuneration at their “fair” value, the most efficient workers may be encouraged to apply for in the field of finance and, consequently, turn away from other sectors. Seeing the growing number of students leaving college to engage in finance, James Tobin (1984) feared that the expansion of the financial sector would lead to a poor distribution of “talent” to the detriment of other sectors of the economy. in particular, activities that are critical to long-term growth or collective well-being [Murphy et alii, 1991].

Observing a sample of 13 countries between 1980 and 2005, Christian Knier (2013) legitimized these fears. She found that financial liberalization is linked to training in the financial sector; that financial reforms have generally slowed the growth of skilled employment in skilled and skilled sectors compared to skilled and skilled sectors; and that such reforms have tended to be accompanied by a slowdown in productivity growth, overall factor productivity and value added in skilled labor-dependent industries. These findings are consistent with the “brain drain” scenario for funding.

A little Swedish lesson

It is difficult to determine to what extent the increase in financial remuneration is due to increased efficiency of its employees or greater enthusiasm for rent by the latter. These two explanations are not mutually exclusive: financial workers were able to both increase efficiency and better know how to receive rent.

In a new study, Michael Böhm, Daniel Metzger, and Per Stromberg (2022) compared these two explanations with Sweden, a country that has undergone wage changes in the financial sector that are very similar to those in other countries, including the United States. .schedule). To do this, they used a large administrative database for the period from 1990 to 2017. This database has the special advantage of providing accurate information on the professional trajectory of all Swedish workers and the level of their remuneration, as well as indicating their level. “Talents”, in particular according to the results of ability tests organized by the army.

Examining these data, Böhm and co-authors do not find any evidence that financial sector workers have become more talented: although they are on average “more talented” than others, but their level of “talent” has declined. did not improve during the study period in either absolute or relative terms. In addition, the growth of relative salaries of finances is observed at each level of diploma and “talent”. These results provide assurances about the possible brain drain to finance.

On the other hand, Böhm and his co-authors believe that half of the increase in wages in finance is due to the increase in profits that the sector shares with its employees. It seems that financial workers have received more rents, certainly to the detriment of other sectors of the economy.

(1) There are other channels through which the financialization of the economy directly affects, rather than simply calculated, the distribution of income (see. Carsten Kohler etc2018).


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