What explains the surge in bankers’ pay? Profits have got bigger, not their brains

theguardian.com:

I cycle into the office past the massive townhouses of Islington in north London. Totally unrelatedly, the thought often flashes into my head during the commute: why do bankers get paid so much?

Maybe those wages reflect the industry attracting the brightest minds, who then do much more productive work than the rest of us. After all, many other industries complain about finance “brain draining” the rest of the economy.

But brainy bankers doesn’t explain what’s going on, concludes new research drawing on the aptitude tests that young Swedish men used to complete on entering (until recently) compulsory military service and women’s school grades. It shows that, while finance workers are more talented on average, they did not get more so from 1990 onwards, which is when earnings went beserk. In the US and Sweden, finance workers used to earn 10% more than other private sector workers in the mid-80s, but by the mid-2010s they were earning 70% more. Those with better university qualifications have drifted towards finance, but that at most explains a fifth of the faster pay growth for men in finance.

So why did wages surge? At least half is because financial firms’ profits are up and bankers can capture a load of them. That might be because they’re protected from competition from other workers who find it hard to move across into finance later in careers.

This research tells us that rising profits rather than rising talent lie behind the banking wage surge that has contributed to higher inequality. But it’s also given me a new mantra to get through my morning commute: richer ≠ better.

Torsten Bell is chief executive of the Resolution Foundation. Read more at resolutionfoundation.org