There's one enduring mystery about Wall Street, and that's why it's paid so damn much.
That's the question Michael Lewis puzzled over back when he was a bond salesman at Salomon Brothers getting a $225,000 bonus just two years out of college—and that, mind you, was in 1987. "Why did investment banking," he asked in Liar's Poker, "pay so many people with so little experience so much money?" Well, the simple answer was that "when attached to a telephone, they could produce even more" because "producing at an investment bank was less a matter of skill and more a matter of intangibles—flair, persistence, and luck." Wall Street, in other words, made so much because "the money was just there."
That's as good an explanation as you'll find. Now, you could try to tell a story about banks reaping their rewards for allocating capital wisely or forcing companies to be more efficient or whatever other hand-waving you prefer, but hahaha do you remember the word "subprime"? The reality is that Wall Street is just lucky enough to be sitting in the middle of a giant pile of money, and siphoning off what it can.
And now we have some numbers to show just how much. Steven McIntosh of the University of Sheffield has looked at longitudinal data to see how much more British workers—controlling for job title, age, gender, and region—made when they were in finance than when they weren't. The beauty of this approach is it also controls for each person's abilities, since it's comparing what the same worker earned in and out of "the City" (Britain's version of Wall Street). And the result was that people made 20 percent more doing the same type of job in finance that they'd done outside of it. That premium was even bigger for fund managers and security dealers—55 and 49 percent, respectively—though there was still one for lower-skill jobs. That's why secretaries make more on Wall Street than anywhere else.
That brings us back to why. Now, it could be that finance workers are just smarter than everybody else. Or that technology has helped them more than others. But neither of those explain why the Wall Street premium has increased much more than their academic test scores, or why it exists for all their workers. The only explanation that makes sense—which isn't as tautological as it sounds—is that Wall Streeters make more money, because Wall Street makes more money. And Wall Street makes more money, because financial deregulation has let them rake in big rents, basically profits above and beyond what you'd expect. Indeed, McIntosh calculated that finance not only has bigger rents, but it also shares more of them with its workers. Specifically, non-finance wages go up 0.15 percent for every 1 percent increase in rents, while fund managers and security dealers get 0.9 and 0.63 percent more respectively.
The money, as Michael Lewis told us, is just there. And Wall Street is free, and isn't too shy, to grab it.