Something Odd Happened To Wall Street Salaries After 1987

A new study shows something bizarre happened to financial sector salaries after 1987: they began skyrocketing.

Writing in the Quarterly Journal of Economics, professors Thomas Philippon and Ariell Reshef say that until that year, workers in finance earned the same education-adjusted wages as other workers.

But by 2005 executives in finance earned 250% more than executives elsewhere, and there was a 300% premium for workers in finance in the Tri-State Area, they write.

What happened?

Basically, pay got started going haywire once deregulation kicked in. 

The authors use a special deregulation index that takes into account credit intermediation, insurance and other factors and come up with the following graph:

financial sector wages

Photo: Philippon and Reshef

In particular, they identify the relaxing of the Glass-Steagall act in 1987 as the catalyst to the wage explosion.

Relaxing the law, they write, “changed both the organisation of investment banking and competition within the sector and therefore should have a bigger impact.” 

They conclude by saying Dodd-Frank could close the gap substantially:

Changes in financial regulation are an important determinant of all these patterns. The ultimate test of this hypothesis may be the evolution of wages in the next 5–10 years. If new regulations (Basel 3, the Dodd–Frank Act, etc.) are effectively implemented and if we are correct, then we expect both wages and skill intensity to converge and excess wages to disappear.

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