Are Bankers Really Overpaid?

LONDON – Are financial sector workers paid too much? Not all of them are, of course, for there are poorly paid bank clerks and cleaners who count in this category.  But is it possible to justify the enormous rewards earned – or should we say received – by investment bankers, hedge fund managers and private equity partners?

Most people would easily and quickly answer “no.” Certainly that is what Congressmen in the US, and Members of Parliament in the UK think. They are trying to cook up ways to discipline financial firms, albeit without conspicuous success so far, as demonstrated by the large sums stashed away for employee compensation by Goldman Sachs after its most recent profitable quarter.

But what does it mean to say that financial folk are paid too much? By what measure, and in relation to whom are they overpaid? Like many other people, I tend to believe that anyone paid more than me is prima facie over-rewarded, but I know this is not the most rigorous test I could apply.

Economists have been trying to produce more robust answers to those questions. Thomas Philippon and Ariell Reshef, for the National Bureau of Economic Research, have looked at a hundred years of data in the US, for pay in finance, and in other occupations. Their conclusions are fascinating.