Patrice Riemens on Fri, 20 May 2011 13:13:00 +0200 (CEST)

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<nettime> Edouard Challe: The rent of the financial industry has been captured by the highest salaries.

For the amateurs/ connoisseurs of 'rent', enjoy!

from: Le Monde, Dossier Economie, Tuesday May 17, 2011.

Edouard Challe (EC): "The rents of the financial industry have been
captured by the highest salaries"
Interviewed by Antoine Reverchon (AR)

AR:  Together with Pierre Calhuc, you have researched the linkages between
financial bubbles and income distribution. What are the outcomes?

EC:  Economic research has shown a worldwide trend for the very high
incomes to rise over the past twenty years. This includes not only capital
incomes, but also the highest salaries, and top level bonusses. The
further you are into the highest 10%, 1%, 0,1% slabs of income, the
greater this rise has been.

There are two traditional ways to explain this phenomenon. The first is to
say that technological progress exert an upward pull to the remunerations
of the most qualified personel, as they master the knowledge of
information and communication technologies, which are the vectors of this
progress - whereas the Industrial Revolution tended to favorise the masses
of non-qualified labour. Conversely, in the second explanation,
globalisation drags down the salaries on non-qualified labour, as it must
compete with the low cost labour in emerging economies.

But when one takes a much closer look at the precise structuration of the
highest salaries, one discovers that these are mostly distributed among
corporate lawyers, CEOs, 'celebs' in sports and show business, and ...
financial sector jobs. It is there that the rise has been at its most
spectacular. Thus, the managers of the 5 biggest American hedge funds earn
more together than all the CEOs of the SP500 index!

AR:  But aren't such high levels of earnings justified by the very high
level of qualification demanded by the growing complexity and
sophistication of the financial sector's produces and services?

EC:  Not at all, since earnings, at the same level of qualification, are
far higher in the financial sector than everywhere else. They are
principaly linked to the ability of finance professionals to capture a
rent within the economic activity, this thanks to the monopoly status and
the asymetry in information which is characteristic of the industry.
Financial relationships are by nature non-competitive, as they are based
on two-sided trust, something that is conducive to the development of
rent. During speculative bubbles, as we have seen them over the past
twenty years, like the boom, followed by the real estate bubble,
this accumulation of rent takes place at an extraordinary scale.

AR:  But seen in absolute numbers, does not the level of these
remunerations simply reflect the amounts of money that are currently being
handled by the financial industries, and which qre supposed to benefit
investments in other sectors of the economy?

EC:  IF markets were efficient, then for sure a redistribution of the rent
through investments would take place. But this rent is actually captured
(by the very highest incomes -PR) in the form of remunerations, and this
has two major consequences. First, there is a further increase in the
overall inequality of incomes. Second, human resources are ineficiently
distributed across the labour market. The financial sector sucks in the
most qualified people, at the expense of other sectors of the economy.
Three times as many Harvard graduates go to finance than was the case
twenty years ago. The same happens in Europe as well.

AR:  But if the financial sector creates value and jobs in numbers
traditional industries are not any longer able to as they are being
delocalised - where is the problem?

EC:  To believe that the financial sector is conducive to economic growth
is illusory, as its own growth is based on speculative bubbles. And there
is no room on this planet for more than two global financial centres like
London and New York. In the long run, the ill-advised allocation of human
resources in favor of finance will lead to macro-economic inneficiencies.

AR:  Can these tendenties be corrected then?

EC:  YES, if, as consequence of the crisis, we would have embarked into a
real re-regulation of the financial industry, in which case one could
have hoped for a re-allocation of resources of qualified labour. But this
is not the sort of policy options that are being followed, especially not
in the U.S. Bubbles are therefore here to stay, and the lure of very high
salaries in the financial sector will continue to disrupt the labour
market and enhance inequalities.

Edourd Challes is professor of economiccs at the Ecole Polytechnique and
senior research fellow with the CNRS.

Antoine Reverchon is economist.

Q&D translation by Patrice Riemens
Cotignac, May 19, 2011.

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