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Thursday, October 30, 2008

Is the finance boom over?

At least for a while. Note the dip after the great depression -- is that where we are headed?

This data comes from papers by Thomas Phillippon (MA in physics, Ecole Polytechnique, PhD in economics, MIT -- vive Les Grandes Ecoles!). See here and here; via Zubin Jelveh.

From 1900 to the mid-1930s, the financial sector was a high-education, high-wage industry. Its workforce was 17% more educated and paid at least 50% more than that of the rest of the private sector. A dramatic shift occurred during the 1930s. The financial sector started losing its high human capital status and its wage premium relative to the rest of the private sector. This trend continued after World War II until the late 1970s. By that time, wages in the financial sector were similar to wages in the rest of the economy. From 1980 onward [deregulation!], another shift occurred. The financial sector became a high-skill high-wage industry again.

The figure below (click for larger version) shows the relative incomes of engineers and financiers over time. The data on the right is for those with postgraduate degrees. Perhaps the collapse of the finance bubble will reallocate human capital back into more "productive" activities?

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