Finance Salaries: A Reply

Free Exchange responds to my declaration that finance-sector salaries should be slashed:

The problem, however, is with self-selection. The most talented people in finance would be the ones to go. Even in the worst labour market talent is in demand. Workers may go abroad, where finance jobs still pay well, or into another industry. The finance industry will be left with a less-skilled labour force, which will lead to an unambiguous decline in performance.

First, finance jobs don't pay more abroad than they do in the US. There's always a hot emerging market somewhere where a few lucky bankers are making millions, but they're the exception. Most countries' finance industries are more like Japan, where bankers make a fraction of the going rate in New York or London. (And no, there aren't many jobs in London.)

As for other industries, they pay much less than finance, as a rule. And although bankers flatter themselves that they're so smart they could work anywhere, that's really not the case: the skills needed to run a trading desk don't translate well to a widget manufacturer.

But most importantly, we simply don't know whether a less-skilled labour force would "lead to an unambiguous decline in performance". Especially considering the decline in performance we've seen with today's, ahem, highly-skilled labor force. The "dumb" banks -- the ones which just took in deposits and underwrote loans -- have massively outperformed the smart banks, after all.

The Economist's blogger continues:

It is hard to justify the kind of money Vikram Pandit got as he presided over Citibank this past year. But why else would you become the face and shoulder the responsibility of such an embattled bank, many of whose problems predated your tenure?

I don't buy it. "Vikram, do you want to be CEO?" "How much are you paying?" "$10 million." "Not enough." "$20 million?" "OK, I'll do it." It doesn't work like that. People accept high-profile CEO jobs for lots of reasons, and they decline them for lots of reasons as well. But they don't decline them because they aren't paying enough.

The blogger does concede that she "wondered if salaries in other fields, such as engineering, might not include positive externalities and if high finance salaries therefore constituted a labour market failure". The answer is yes: it's very difficult to come up with a model which explains why financial-sector salaries are so high, given the demand for the jobs in question. But she quickly moves on: "other industries cannot thrive without a burgeoning financial industry", she says. Oh yes they can, very much so. Look at the thriving industries in the BRIC countries: are they built on a burgeoning financial industry? Not at all. And I don't think that Google, say, has relied much on financial technology to get to where it is today.

In fact it's simply not true that the finance industry needs to burgeon (ie, grow) in order for other industries to do well. The finance industry can and should be a modest intermediary, adding a little bit of value here and there, but not always growing so that it takes up an ever-larger proportion of GDP. Right now, few people would disagree that the finance industry, in toto, needs to shrink. That's not "hobbling" it, as Free Exchange would have it. Maybe "optimizing" is a better word. Let's have fewer bankers, making less money. And put all that skilled labor to more productive use.