So, about those bankers bonuses then

Polly tells us that:

Yesterday\’s report from the Centre for Economic Performance showed how bonanza bonuses in the finance sector cause risk-taking that contributed to the financial crisis.

The report is here.

The report says no such thing actually. What it does say is a great deal more interesting.

We can provide some estimate of the total amount of aggregate income involved in
these recent changes. The National Accounts record total wages and salaries in the
UK. This figure rose from £407bn in 1998 to £652bn in 2008.5 In 1998, the top decile
would have taken £108bn of this total. If their share had remained constant, they
would have received £173bn in 2008 – a gain of £65bn in nominal terms. However,
the rise in their share of the total wage bill resulted in them receiving £193bn. Of this
additional gain of £20bn, £12bn went to the top 1% of earners.

Top earners have been getting an increasing share of an increasing pie. No, not that a one sized pie has been sliced up to that the top earners get more of it.

The financial sector has witnessed a substantial rise in gross value added over the last
decade. Figure 10 shows gross value added per employee relative to the economy
average for manufacturing, finance, other business services and other services. Over
the period 1995-2007, the economy as a whole saw a 65% rise in GVA per employee.
The rise across broad industry was roughly the same except for finance which saw a
rise of 156%. Other figures show a similar pattern of gains for the financial sector.
For example gross trading profits per employee reported to the tax authorities rose
70% over the same period across the economy but the rise in finance was 114%.
However we measure corporate performance, there was a substantial outperformance
by the financial sector over the last decade.

Finance has been adding more value per employee than other sectors. So it\’s finance itself which is (in part) responsible for growing the pie. They\’re not just skimming off value created by others.

The evidence also seems to suggest that the financial sector may be more susceptible
to superstar effects than the rest of the economy. Figure 12 shows the top percentile of
wages broken into 20 equally-sized bins separately for finance and non-finance
workers. The top bin now covers the top 0.05% of workers. This top group take 23%
of top percentile wages in the financial sector and 21% in the other sectors. The chart
suggests that the dispersion of remuneration is higher in finance than in other sectors
within the top percentile.

And we have superstar effects. By the nature of the talent pool those just marginally ahead of the pack will get the lion\’s share of the larger pie.

We suggested that not all of these gains to financial services were purely due to rent
sharing, as they were not equally distributed to all bankers. There is some element of
the “superstar” phenomenon where even within the financial the gains are skewed to
those who can leverage their ability across a more globalized market.

And globalisation!

So, what our academic research actually tells us is that finance has been becoming much more profitable over the past decade or so. Some of that higher profit goes to those who work within finance ( as we would expect….higher productivity of labour does lead to higger returns to labour). Given that the greater productivity really accrues not just to those who are good at finance but to those who are just that little bit better than all the others at finance we see superstar effects. Those who are just that little bit better get the cream. And all of this is happening in a global market, meaning that finance is no longer skimming 10 p each off 65 million Brits but 1 p each off 6 billion humans.

So, business gets more profitable, staff in that business get more money. The pie grows and those growing the pie get a decent chunk of the growth in said pie.

And the problem with this is?

8 thoughts on “So, about those bankers bonuses then”

  1. The problem is thus;

    Central banks have systematically underpriced interest rates, leading to an explosion of demand for debt. The authorities (through direct monetary expansion and via lax reserve requirements) have duly satiated this extra demand.

    The free market has responded by increasing the capacity to handle all of the debt, by rapidly expanding the financial services sector.

    The pie has indeed grown bigger – but only because we have fiddled the demand and supply curves of money, by fiat.

    The pie is more a money pie (not a reorganisation of the factors of production more efficiently), and money are just claims on wealth. So, IMHO, growth in the finance sector has been at the expense of the non financial sector.

    Finance profits, to a significant degree, represent a transfer of wealth within society, not an increase in societies’ pie.

  2. Two things:

    First, Polly believes others must bake the cake (and supply the ingredients, paid for by pixies, one supposes) and only the likes of her are capable and wise enough to cut the slices fairly. Of course, cake slicing is an onerous task and yes her ilk need a ring fenced half.

    Secondly, Polly could see proof that Banker Bonuses should be cut in the pattern of matmite on my toast this morning.

  3. This ties in, by the way, with the nonsense that we get from the likes of Adair Turner at the FSA, when he talked a few months ago about how London’s financial services sector was too big, in some way, compared to the rest of the economy, and that a lot of went on in the City was “socially useless”. What he ignored – shockingly for a supposed clever-clogs – is that London does not just as a financial hub for the world’s 5th or 6th largest economy, but is a hub for much of the world, straddling as it does a bunch of market time zones, etc.

  4. @JP. Absolutely true – the City earns vastly more from across the globe than at home, so the City itself is a great net benefit for the UK.

    However, the net benefit of the ‘financial services industry’ per se, relative to the economy it purportedly serves, is overstated.

    A lot of those superstars are paid via monetary profligacy somewhere (or everywhere?) in the world

  5. Problems in my opinion:
    * Too much debt all round.
    * Too much government/central bank meddling (I’m echoing JT and Les on these two).
    * Too lax an attitude to inflation.
    * Financial markets give governments too easy a ride based on future unfunded liabilities such as pensions.
    * Problems with the mutual fund industry have been well documented by the likes of John Bogle. Basically they are dominated by marketing departments selling the latest fad, rather than focusing on their fiduciary responsibilities.
    * Bonus culture and government guarantees encourage excessive risk taking. One solution could be to make bonuses symmetric.

Leave a Reply

Your email address will not be published. Required fields are marked *