NYU prof Thomas Philippon and U-VA Prof Ariell Reshef have written a paper tracing the trajectory of wages in the American financial sector over the last century. Not surprisingly, financial-industry wages broke away from the rest of the economy starting in the early 1980s and continued their stratospheric relative increase through 2006.
Toward the end of the period, financial-industry wages actually reached pre-Depression peaks relative to the rest of the economy, explaining New York’s huge and unprecedented jump-ups in tax collections.
If the history in the paper is any guide, New York (city and state) will have to get used to sharply lower wages in its key industry, and thus sharply lower tax collections.
They nut graf of the paper from New York’s point of view, first flagged in Floyd Norris’s Times column, is as follows:
From 1909 to 1933, the financial sector was a high skill, high wage industry. A dramatic shift occurred in the 1930s: the financial sector rapidly lost its high human capital and its wage premium relative to the rest of the private sector. The decline continued at a more moderate pace from 1950 to 1980. By that time, wages in the financial sector were similar … to wages in the rest of the economy. From 1980 onward, another dramatic shift occurred. The financial sector became once again a high skill, high wage industry. Strikingly, by [2006,] relative wages and relative education levels went back almost exactly to their pre-1930s levels.
I have written of how New York benefited immensely from the financial sector’s trajectory starting in the early 80s (and, indeed, talked to Prof. Philippon as part of my research for the article). E.J. has written (with amazing charts) of how New York came to depend on the financial sector’s wages.
The key lesson for New York policymakers to take away from the paper is that the region may not see the likes of these financial-sector wages — and the tax revenues they threw off — for a half-century or more.