We pay extra for pain.

Wall Street Pays Its Workers to Suffer

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Why do people on Wall Street get paid so much? It could be because Wall Streeters have generally high skills. Finance people tend to be good at using computers and working with numbers, but also at networking and forming business relationships. But a new study shows that there really is something special about Wall Street -- when a worker moves from another industry into finance, his or her wages jump by an average of 37 percent. Even secretaries get paid more on Wall Street.

So what's going on? The study's authors hypothesize that "rent sharing" is the cause. In the words of Matt O'Brien of the Washington Post:

The only explanation that makes sense—which isn't as tautological as it sounds—is that Wall Streeters make more money, because Wall Street makes more money. And Wall Street makes more money, because financial deregulation has let them rake in big rents, basically profits above and beyond what you'd expect.

But there's something fishy about this explanation. Finance rakes in more surplus dough, but if the authors' calculations are right -- and there are surely a lot of assumptions buried in these numbers -- finance is also more generous in spreading the wealth around. O'Brien again:

(F)inance not only has bigger rents, but it also shares more of them with its workers. Specifically, non-finance wages go up 0.15 percent for every 1 percent increase in rents, while fund managers and security dealers get 0.9 and 0.63 percent more respectively.

This is odd, since Wall Street executives seem like exactly the kind of people who wouldn't pay secretaries any more than the market demanded. Even if there's just more money sloshing around in finance, why would the Masters of the Universe let the hired help take a cut, just out of the goodness of their hearts?

Instead, there may be some other reasons why finance people get paid so much more for the same skills. Here are some hypotheses:

1. The Bad Guy Premium: Many people believe that finance doesn't really do a lot for the world -- that it just sucks money ("rents") out of the real economy through sneaky tricks and legal loopholes. In addition, the culture is often identified with greed and venality. Just the other day, Bloomberg View columnist Michael Lewis wrote to caution the college grads of the world to think twice before selling their souls for a fat finance paycheck. Young people have a lot of idealism, and moral purpose can be worth a lot of dollars -- just look at the low wages in the nonprofit sector. Wall Street might have to pay people extra to entice them to work in an industry with such a bad reputation.

2. The Stress Premium: Wall Street famously demands very long hours, but it also demands something few other industries require: Constant risk exposure and market sensitivity. A trader in a traditional big Wall Street bank is always an hour away from losing his or her job. I've heard stories of portfolio managers punching their underlings on the trading floor! You don't get that kind of thing very often at Google, I'll wager. And the stress of market sensitivity bleeds through to the whole organization; secretaries have to deal with constantly stressed-out traders and salespeople.

3. The Aggravation Premium: Taking constant risks and betting on your own beliefs is easier (and possibly more lucrative) if you are aggressive and self-confident. But aggressive and confident people can be a pain to be around, even if you are one yourself. Personality conflicts are bound to be frequent. Salaries could be high to make up for that.

In other words, Wall Streeters might get paid more for the same reason garbage collectors, plumbers and embalmers get paid more than workers of similar skill: It's a dirty job. This is just Adam Smith's theory of wages, which economists -- always good at giving things catchy titles -- call "compensating differentials."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net