Back in the 19th century, the low-paid worked long hours while the leisured classes skived. These days such sought-after jobs as investment banking require round the clock toil. But pay is high — Goldman Sachs analysts’ start at $110,000 — and rising. After an unexceptional decade, pay inflation in the finance sector is roaring ahead. That sounds good news for some, but bad for income distribution.
The rising cost of living has erased recent wage gains for most US workers. Not so on Wall Street. The average bonus rose by a fifth to $257,500 in 2021. In the UK, pay in the finance sector shot up by 23 per cent in real terms in the 26 months to February, according to the Institute for Fiscal Studies. The average real increase in UK pay was just 7 per cent.
Highly paid bankers are less numerous in the EU. Stringent post-financial crisis pay caps play some part, as in Ireland where there is a €500,000 limit. The 3,519 UK bankers earning more than €1mn was more than twice the number in the rest of the EU in 2019, according to the European Banking Authority.
Justifications for bumper pay rises are not obvious from the sector-wide data. Overall, the finance sector’s output did not increase more than other sectors during the pandemic. Nor was the labour market particularly tight.
But investment banking has been on a tear. Banks competed with each other to recruit enough workers to cope with a torrent of initial public offerings and deals. In January Deutsche Bank chief executive Christian Sewing fretted about the “increasingly intense war for talent” after a sharp increase in payroll costs dented the investment banking division’s profits.
All this does nothing for income equality. The finance sector accounts for nearly a third of employees in the top 1 per cent of UK earnings. No surprise then that the pay of the top 1 per cent of employees grew by nearly 14 per cent in the 26 months to February 2022, compared with 10-12 per cent across most of the earnings distribution.
The bonanza’s benefits are not confined to bankers. Banking accounted for 6.7 per cent of all employment tax receipts last year, though it employs just 1.2 per cent of the UK workforce. Even so, the reversal of the pre-Covid-19 trend towards greater pay equality is politically awkward — especially after the pandemic showed that the most essential jobs are often the least valued.