Will Wall Street pay respond to market forces?

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Justin has a column in the new issue of the magazine (the one with Kate Winslet on the cover) about how rising incomes on Wall Street drove the surge in income inequality. One of the finance professors Justin spoke with makes the argument that Wall Street’s pay bump was largely driven by market forces. That as “the sums of money managed and size of transactions arranged by Wall Street grew exponentially, starting in the 1980s, so did profits and pay” (to use Justin’s words). If that’s true, then the market should now work on the downside, too, bringing Wall Street pay back into line. Justin doesn’t necessarily agree with that conclusion, and I’m not sure I do either, although I did dig up a little evidence that the market might at least give us a big push in that direction. Check out this chart, which I made using data from the Office of the New York State Comptroller:


The overall trend is a sharp increase, that’s true, but look at what happened after the tech blow-out in the early 2000s. Of course, what I’m looking at here is just bonus pay, which you’d assume would be more closely tied to something like deal volume. I’d be curious to know if base salary has responded in the same way.


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