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Inquiry Into Financial Industry Labor Feedbacks in the United States

In Economy on January 15, 2014 at 2:35 AM

January 15, 2014

The objective of this study is to better examine and document a long time-series of American labor ratios pertaining to the financial industry relative to the overall economy. For example, how many individuals are employed, whether full-time or part-time, in the financial industry relative to the total of all industries? And how has that percentage evolved over time? Results follow after the break.

Regarding American labor studies, many domestic economists and international ones have reviewed the structure of the U.S. economy to date. For instance, Michael Spence and Sandile Hlatshwayo have comprehensively reviewed the employment situation as part of a Council on Foreign Relations study published in 2011, wherein they document the evolution of so-called “tradable” industries versus “nontradable” industries over time.

According to their report, the overarching trend in American hiring over the past two decades has overwhelmingly been slighted toward growth in nontradable sectors, e.g., health care and government. The authors indicate that such sectors, at least ones like the health care sector, which constitutes roughly 16 percent of the national economy already, are likely approaching limits and the U.S. will better benefit by moving to expand “the export sector” and increasing investment in human capital, technology and infrastructure outlays in order to adapt to timely themes of growing inequality of income distribution resulting from stronger international playing fields for hyper-competitive and active multi-national companies. A “market failure” in their eyes does not necessarily exist, but multi-national companies have rather become just more central players in charge of developing trade and, therefore, distributional contexts for income and hiring.

Larry Summers has delivered his NBER Martin Feldstein Lecture on just the same distribution issue as Spence and al. Esther Duflo of MIT has developed random field experiments that have recently merited attention regarding poverty and jobs. And internationally, Jacob Kirkegaard of the Peterson Institute for International Economics has delivered timely overviews regarding the German labor market experience with concentration on their successes that might be applied to the American labor market.

As for the data utilized here, labor industry data from the Bureau of Economic Analysis (BEA) is solely used in this analysis to isolate percentage and raw numbers for the purposes of answering the questions posed above. Having said that, please note the slight data shifts in categorizations and grouping occurring according to various industry classifications as present in the underlying data. Special notes are as follows, North American Industry Classification (NAIC) versus Standard Industrial Classification (SIC) of industries applies from 1997 onward.

How many individuals are employed, whether full-time or part-time, in the financial industry relative to the total of all national industries? The answer to this question, if you look at the so-called “FIRE” sector which stands for the common BEA grouping of the finance, insurance and real estate sectors, is 7,325,000 individuals as of 2012 representing a more than $600 billion dollar industry. Nationally the total industry numbers are 138,756,000 and $6.9 trillion, respectively. The peak number of individuals in the FIRE industry measured 7,756,000 in 2006 just before the recession and 2012 represents the peak year by dollar size. In real terms, however, different inflation-adjusted measures might be preferred. That is why percentages are helpful in measuring the FIRE industry’s size relative to the rest of the economy (see Figure 1 below).

Figure 1: Labor in the Financial Industry v. All Industries
FIRE

Regarding Figure 1, you will see four graphs paired together examining the FIRE industry relative to the national economy. Of particular interest in the figure is the graph present in quadrant I (that is, the top right quadrant). Graphed here is the percentage of wages and salaries accrued to the FIRE industry relative to the total of wages and salaries for all industries. Presented within the same graph is the percentage of employees working in the FIRE industry relative to the total number of employees working in all industries, i.e., 9 percent and 5 percent as of 2012, respectively. Interestingly, that 4 percent gap has been roughly persistent for the last 10 years since 2003. Historically, a similarly persistent gap (and granted smaller one) persisted after 1929 during the Great Depression period. The percentage graph in quadrant IV especially demonstrates the concentration of income resulting from this patterned development, as evidenced in the fish bowl shape resembling famous graphs of income distribution recently issued by Emmanuel Saez of the University of California, wherein he plots the percentage of income going to particular percentiles of the population using Internal Revenue Service data.

By comparing actual dollar amount in wages and salaries per person, you note the average income per employee for the FIRE industry measured $33,400 more than the average income per employee measured nationally (see the graph in quadrant III); and the typical FIRE industry worker made $83,320 in 2012, i.e., 167 percent of the national average. As a major takeaway, this analysis better demonstrates income inequality trends specific to the various industries as analyzed by BEA data. It is also interesting to observe the long-ranging trend of central tendency existing in the data around a percentage of approximately 105 percent from the years of 1945 to 1980 for the FIRE industry wages and salaries per employee compared to the national wages and salaries per employee. Current accounts deficits and trade deficits, specifically, kick in just around this year. Leverage may also be a culprit along with tax incentives.

For a differing example of another non-financial industry Figure 2 depicts the same measures for the Farms industry, as defined in the National Income and Product Accounts (NIPA) produced by the BEA (see Figure 2 below). In all four graphs you will see here an almost exactly reversed trend in the data as compared to the financial sector results. For example, in 2012 the typical farmer brought home $25,517 in wages and salaries as compared with the national average pay of $49,920, i.e., 51 percent of the national average pay. Another more interesting point is evidenced in the quadrant I graph. At no point in time does the percentage of total farm industry employees to total industries employees breach the percentage of total farm industry wages and salaries to total industries wages and salaries. This theme represents the exact opposite situation compared to the FIRE industry analysis, equating to a higher demonstration of income equality in relative terms.

Figure 2: Labor in the Farms Industry v. All Industries
FARMS

From conversations with financial industry experts Paul Volcker, former chairman of the Federal Reserve, one easily begins to understand the merit in economies striving to find the right balance between hiring America’s best architects to build bridges and not complicated financial products.

Here are some remarks from a University of Virginia panel discussion in 2010 with Volcker. He says, “the trouble with the United States recently is we have the worst of both worlds. We have lousy engineers, and lousy bridges and a lousy financial market as the engineers went to the financial market.” This is Volcker’s conclusion after having relayed to the audience a snippet of conversation he had with an engineering professor in Washington, D.C. who complained that a recently constructed bridge over the Potomac River was overpriced, inefficient and ugly. The professor says too many engineering students are going into Wall Street. Better job placement needs to be part of the solution it would seem.

According to Hesiod, we should value work. Paying down the debt in times of peace and avoiding party factions would be additionally welcomed by George Washington and posterity. Issuing recession recovery bonds and investment tax credits is preferred by other economists. While creating an “employer of last resort” function might please Hyman Minsky and a “Tobin Tax” might please James Tobin, we all might be more pleased if we were to create a reformed labor system like that of Germany or one previously unknown, arranged by MIT, Elon Musk and Sebastian Thrun.

Building an education system resembling Finland’s might be the next big step and the one crucially needed automatic stabilizer to ensure guaranteed persistent education of the workforce over time.

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