New York State yesterday released its annual report on Wall Street pay, reporting that the average New York City securities industry bonus went up eight percent last year, to $121,890. Surprised? Didn’t think so. That Wall Street bonuses went up is roughly as unexpected as an airplane getting delayed at O’Hare: it doesn’t happen every time, but you can usually bet on it.
That climb has made Wall Street bonuses the focus of the current debate about inequality. The $121,890 average includes bonuses for everyone from secretaries to traders and senior executives. For those last categories alone, the numbers would be much, much higher. I’ve taken the New York State Comptroller’s report, which lists bonuses all the way back to 1985, and adjusted the numbers to 2012 dollars, to account for inflation.
The result: Since 1985 the average securities industry bonus in the city has risen about four-fold. There’s a big jump from 1990 to 1991, when bonuses went from about $27,000 in real-dollar terms to $52,000, and a series of further increases from there. Bankers and traders in a bad year now earn much more than they did in a good one. You can see the chart to the right.
So what accounts for the rise in Wall Street pay? Defenders of the compensation status quo tend to point to increased productivity. Foes ask, reasonably, what the heck folks on Wall Street do that makes them worth so much more. There’s some data in the report that goes a long way toward explaining the increase — though probably not nearly as far in justifying it.
The next chart uses the numbers from the state report and the Securities Industry and Financial Markets Association to compare the total inflation-adjusted bonus pool for New York City to the number of industry workers in New York. You’ll see right away that the second part just doesn’t change much. In 1985, the industry had about 130,000 employees in New York. Last year, that number was 169,200 (fewer than in 1997, and barely more than the 163,000 workers in 1987).
Meanwhile, the bonus pool has risen in real-dollar terms from $4.1 billion to $20.1 billion. The industry and its profits have grown with the economy, which has roughly doubled in size since 1987 (and financial services has grown more). The number of highly-paid New York-based employees has not.
The economists Robert H. Frank and Philip J. Cook anticipated this kind of trend in their book “The Winner Take All Society.” For a long time, I resisted the idea that the economy had changed in ways that brought the big rewards to the top of the pyramid. For one thing, I thought, every superstar, whether in banking or movies, creates work for many other folks. In addition, I assumed that if fewer highly skilled employees were needed to do the same job, then supply and demand should dictate that those employees would earn less.
The New York City data, though, are compelling. University of Chicago economists Steven N. Kaplan and Joshua Rauh have theorized that the main reason for the rise in Wall Street pay is that “asset managers, investment bankers, lawyers, and top executives now apply their talent to much larger pools of assets.” The bonus charts support that explanation.
You can argue about whether there’s something special about those folks, or whether they’ve just gotten lucky. You can’t argue with the math, which shows unequivocally that income at the top is growing because essentially the same number of people are splitting greater profits.
Next week I expect I’ll take a more careful look at this, moving beyond New York City. There are other factors to consider, like the drop in the city’s share of industry employment from about 30 percent in 1992 to 21 percent now. Nonetheless, I suspect the general principle that the jobs at the top of the economic ladder are becoming ever more lucrative as their industries scale up without adding staff will hold up. If so, that reveals some truths uncomfortable for both sides in the debate over incomes at the top. For the harshest critics of Wall Street. the fewer employees/more profits explanation isn’t exactly the cloak-and-dagger conspiracy they might wish for.
On the other hand, for those who think that all is just hunky-dory on the inequality front, this isn’t exactly a pleasing result either. Fewer people sharing more profits means Wall Street employees may be more “productive” — but not in any way that non-economists understand that word. It’s not that they work harder or have somehow gotten vastly smarter. It’s just that it doesn’t take many more people to do a $300 million deal than a $50 million. That basic fact does a lot to explain why incomes on Wall Street have grown. It doesn’t do anything to make it seem fair.