Tuesday, January 27, 2009

Yes, bankers are overpaid and no, it will not last


The below graph comes from this authoritative study of financial service industry wages in the US by Thomas Philippon and Ariell Reshef, which has just been published as an NBER working paper.

(It’s the same study that the NYT’s Floyd Norris wrote about over the weekend.)

Graph of historical excess wages finance industry

The gist of the study is that wages in financial services - as the above graph seems to indicate - are factors of unsustainable banking booms.

It’s slightly more sophisticated than that though. The authors argue that the wage increases are related to greater skill requirements: in both the 1930s and the 1980s, there was a higher demand in financial services for employees that could handle complex transactions involving credit risk, for example. In support of that, the authors map metrics for the average educational attainment of financial services employees over the excess wage results and show that there is a fairly good relationship between the two.

Anyway, the message isn’t exactly a happy one for current - or rather, future - financial services employees. If the historical precedent is anything to go by, and the clamouring for banks to indeed return to less racy times is heeded, then IB mega-bonuses and other accoutrements may well be a thing of the past. Until the next significant bubble anyway.

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