Monday, May 25, 2015

Has the financial sector fully recovered from the Great Recession?

So says NYT financial columnist Neil Irwin.  The evidence:

  • Employment has returned to 2007 levels
  • The pay gap between financial services and the rest of the economy has recovered; it is now a 3.6:1 ratio!
  • Entry level pay for Ivy League grads at investment banks went from $70k to $85k this spring
  • Vacancy rates at prime Wall St real estate are down to 5%
This is obviously good news for those with aspirations of working in this sector.  But is it good news or bad news for the economy?  The article cites research by economists at the Brandeis, Chicago and NYU b-schools which suggests that the size of the financial services sector does not appear correlated with economic performance.  Financial markets are supposed to reallocate capital to firms with profit-making opportunity from those that are tapped-out.  In theory this should lead to increased productivity, but in practice the data show that a large financial sector leads to weaker productivity growth.  

One fear is that the recent rebound in employment is associated with regulatory compliance in an industry that now bears a more than striking resemblance to a public utility, thanks to Dodd-Frank.  If so, then the allocation of more resources to financial services should be lamented, not cheered.  

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