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August 6, 2007

Highly paid ursines and bovinae

Brad DeLong and Tyler Cowen are asking why Wall Street workers are so highly paid.

I see three aspects, the first of which applies broadly to wall street and the last to only the very highest paid folks. First, Wall street workers are highly productive workers. It doesn't take much more work to do huge deals than tiny ones because the technology is leveraged effectively, and examining the changes in volumes o . Second, Wall Street pays huge salaries because they want to attract people who would otherwise start their own businesses, and based on their credentials, connections, and work ethic, that alternative would be successful for many. People seem to be paid based on their next best use of their labor, with their marginal product as a cap.

Check out this graph of Dow Jones Industrial Average volume, it has had nearly exponential growth over the last few decades, and trading volumes look like that in just about every financial product:

The last one is the winner take all / first mover advantage aspect, where wall street seems to have outsize rewards to moving a bit faster, with a bit higher volume, or by knowing a few extra people.

Posted by OneEyedMan at August 6, 2007 6:35 PM

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