Richard Florida
by Richard Florida
Thu Jan 29th 2009 at 11:04am UTC

Finance Salaries Heading Back to Earth

Could the hegemony of finance – in terms of attracting talent at least – be over? Quite possibly, according to new research by NYU’s Thomas Philippon and Ariel Reshef from the University of Virginia who write that up to half the pay premium enjoyed by bankers in recent years will “disappear.” The New York Times reports:

The professors calculate that relative financial wages, taking into account education and other demographic factors, declined sharply in the 1930s and then at a slower pace until about 1980, when there was virtually no difference. Then, in a new era of financial innovation, “The financial sector became once again a high-skill, high-wage industry,” Mr. Philippon wrote on the N.Y.U web site this week…

The authors offer several reasons why financial salaries soared in the 1920s and again since 1980. It isn’t computers, they argue, because there were no computers the first time, and it is not just a strong stock market. Instead, they attribute it in part to strong demand for financial analysis at a time when technical revolutions were leading to an explosion of new stock offerings and loans to young and risky companies. Before 1930, that was the electrical revolution. More recently, it was information technology.

There is also the lure of increasing financial innovation, which they say is least likely to occur when there is more regulation. “Highly skilled labor left the financial sector in the wake of Depression-era regulations, and started flowing back precisely when these regulations were removed.” …

[S]ociety could benefit from a flow to other industries. “As a society, do we want to put a third of our best brains in the financial sector?” he asked, pointing to a study indicating Harvard graduates from the early 1990s were far more likely to go into finance than were those who had graduated a decade earlier.

One Response to “Finance Salaries Heading Back to Earth”

  1. Jim H Says:

    add regulation watch people/businesses leave. Increase taxes watch the government take in less. Push through a stupid spending bill through congress watch the economy not respond. Why is it so hard to understand?