Why finance majors make more than engineers

[phantom power]

Back in the 1970s and early 1980s, kids coming out of college didn’t lust after jobs in finance. The reason was simple: Finance jobs didn’t pay as well as those in other professions. That may be hard to imagine now, with some first-year financial analysts pulling down six-figure salaries and potentially six-figure bonuses, while newly minted engineers can only expect to earn around $70,000.

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The two didn’t pursue this idea out of idle curiosity. Finance accounts for 15 to 25% of the overall increase in wage inequality since 1980, they say. To put it another way, lopsided compensation in the financial industry has greatly contributed to the disappearance of the middle class and the polarization of the U. S. into a country containing mainly people with low and high incomes.

The two economists, Thomas Philippon and Ariell Reshef, discovered something odd: There was another time in U. S. history when wages in the financial sector outpaced those elsewhere. That period extended from 1909 to 1933 which, in a spooky echo of today, spanned the roaring twenties, the 1929 stock market collapse, and the initiation of the Great Depression. It also casts doubt on the concept that information technology has been the force driving higher salaries — after all, there were no computers in the 1920s.

What the economists did find, however, was that the relative rise of salaries in finance corresponded with progressive deregulation of the industry beginning in the 1980s, probably because deregulation can intensify innovation and competition for talent. Similarly, salaries in finance started to fall during the 1930s, 40s, and 50s, not because of the punk economy or any nostalgic ideas about the rise of manufacturing industries. The more probable explanation, say Philippon and Reshef, is that that period was one of relatively heavy regulation of financial firms and, coincidentally, much higher tax rates on higher incomes.

http://machinedesign.com/article/why-finance-majors-make-more-than-engineers-1020