Media Briefings

BIG PAY PREMIUM FOR ANYONE WORKING IN THE UK’S FINANCE SECTOR

  • Published Date: April 2014

 

The same person doing the same job will earn 15-20% more doing that job in the finance sector than anywhere else in the UK economy. That is the central finding of research by Joanne Lindley and Steven McIntosh, to be presented at the Royal Economic Society’s 2014 annual conference.

 

Their study shows that in certain generic occupations found in both finance and non-finance – such as corporate managers, ICT professionals, secretaries, etc – there is a significant pay premium just from working in the financial sector. This suggests that finance workers are sharing in non-competitive profits generated within their sector.

 

The researchers analyse The New Earnings Survey (NES), which contains information on annual earnings and annual bonus payments. Taking account of basic characteristics of workers, such as gender, age and region, they find that:

 

·          Average pay in the finance sector is 61% higher than in non-finance sectors. While such factors as workers’ qualifications and skills, their occupations and the tasks involved in their jobs all have some role to play in explaining high wages in the finance sector, none can satisfactorily explain the growth in financial wages.

 

·          Finance sector wages are 10-20% higher for workers of all qualification levels doing all types of jobs. The premium is not due simply to high wages at the top of the wage distribution dragging up the average, but is observed at all points in the distribution.

 

·          When the same individuals move in and out of the finance sector, they are paid a 37% higher wage in the finance sector.

 

The authors comment:

 

‘The fact that all finance sector workers, regardless of occupation or education, receive a pay premium suggests that finance workers are sharing in non-competitive profits generated within their sector.

 

‘Rising wages in the finance sector can then be explained by an increasing ability to extract such rents. This could be caused by financial deregulation, the growth in the range and complexity of financial products giving finance workers an asymmetrical information advantage or, more recently, by the financial bailouts providing insurance against risk.’

 

More…

 

The wages received by those in the finance sector increased dramatically leading up to the financial crisis. Official data based on tax returns suggest that the ratio of finance sector pay to average pay in the UK increased from 1.81 in 1997 to 2.63 in 2009, and if anything has continued to rise since. High wages in finance are observed in most countries, though the UK ranks among the highest.

 

This research shows that while factors such as the qualifications and skills of workers, the occupations they do and the tasks involved in their job, all have some role to play in explaining the high wages in the finance sector, none can satisfactorily explain the growth in financial wages. The fact that the finance sector wage premium is similar – in the range of 10-20% for workers of all qualification levels doing all types of jobs – is consistent with the sharing of non-competitive rents (profits) in the finance sector with workers.

 

The analysis is based on secondary analysis of a number of national datasets. The New Earnings Survey (NES) contains information on annual earnings and therefore includes annual bonus payments. Controlling for basic characteristics (gender, age and region), the results show finance wages to be 61% higher than non-finance wages, on average. The premium is not due simply to high wages at the top of the wage distribution dragging up the mean, but is observed at all points in the distribution.

 

As well as comparing finance with non-finance workers, the NES also makes it possible to observe the same individuals as they move in and out of the finance sector. Assuming that their skills and abilities do not change as they move sector, then any change in their wage can be attributed to the move itself.

 

A significant finance sector pay premium of 37% is still observed. Furthermore, when focusing the analysis on certain generic occupations found in both finance and non-finance, such as corporate managers, ICT professionals, secretaries, etc, a finance sector pay premium is still observed in each occupation, almost always in the range of 15-20%. Thus, the same person, doing the same job, will earn more doing that job within the finance sector.

 

The researchers investigate possible explanations associated with the supply and demand for labour by skill level. There is evidence that there has been a small rise in the proportion of graduates going into finance, and within the graduate group, an increase in the proportion going into finance from quantitative subjects such as economics. But such changes are not large enough to explain the observed increase in finance sector wages.

 

Similarly, cognitive skills, as measured by childhood test scores, do not seem to be rising among younger entrants to finance. In addition, data from the GB Skills Surveys on job tasks from 1997-2012 show no evidence of any increasing prevalence within the finance sector of the analytical non-routine tasks that are complemented by technology and are associated with higher wages. If anything, the non-finance sector has narrowed the gap in the use of such tasks.

 

The growing finance sector pay premium can therefore not be accounted for using competitive theories of supply of demand for labour with different skills. The fact that it is received by all finance sector workers, regardless of occupation or education, suggests that finance workers are sharing in non-competitive profits (rents) generated within their sector.

 

Rising wages in the finance sector can then be explained by an increasing ability to extract such rents, in turn caused by financial deregulation, the growth in the range and complexity of financial products giving finance workers an asymmetrical information advantage or, more recently, by the financial bail-outs providing insurance against risk.

 

ENDS

 

 

Notes for editors:

‘Wage Growth and Human Capital in the UK Finance Sector’ by Joanne Lindley and Steven McIntosh

 

For further information, contact:

Steven McIntosh, s.mcintosh@sheffield.ac.uk07939 057920

Romesh Vaitilingam: romesh@vaitilingam.com, +44 7768 661095