The US Financial Sector Is Now in Structural Employment Decline
The shift in employment in the United States toward the service sector has long been associated with rising income levels. Generally speaking, the larger a country's services sector as a share of the economy and employment, the richer the country. What, then, is the outlook now that the global economic crisis has struck at the heart of the global services economy, particularly its financial and business service hubs?
A striking aspect of the crisis has been the widespread call for shrinking the role and weight of the high-end financial-services sector. This argument has been especially common among those who argue that the US and UK economies were overly reliant on that sector up until the beginning of the crisis in August 2007. The thought seems to be that somewhere along the way, the financial-services sector evolved from its traditional role of providing necessary financial services to the rest of the economy into something else, a cancerous growth detached from the rest of economy and producing little beyond leveraged products for its own consumption.1 From that idea flows the proposition that it would be valuable for US and UK national welfare if a large part of this sector's highly skilled workforce went somewhere else and did something more productive for society.
Whatever the merits of these arguments, at least in the United States the financial-services sector has already begun a structural decline. That large-scale layoffs in financial services have occurred is not exactly news. But the economic evidence is mounting that a long-term structural shift in employment trends has taken place in the financial-services sector, as well as in the wider US service economy. Building on the structural/cyclical employment-change methodology from Groshen and Potter (2003),2 figure 1 shows that the US financial-services sector3 is now in structural decline relative to the US economy—i.e., it is an economic sector with slower employment growth than the economy as a whole.4
Figure 1 Structural and cyclical employment trends in the financial activities sector 1949–2009
Source: Author, based on BLS CES data.
Figure 1 shows the financial-services sector during the last ten US trough-to-trough business cycles. The figure was computed by subtracting the period-specific employment growth rates of the entire US nonfarm sector from those of the financial-services sector to provide a measure of the financial-services sector's growth relative to the total economy. This methodology splits figure 1 into four quadrants. The upper-right quadrant shows structural gains area, reflecting faster employment growth for financial services than for the economy as a whole during both expansions (the y axis) and contractions (the x axis). The lower-right quadrant shows countercyclical growth—slower employment growth than in the rest of the economy during general economic expansions, but faster employment growth during contractions—while the lower-left quadrant shows structural losses—slower employment growth than in the economy as a whole during both expansions and contractions. The upper-left quadrant shows procyclical growth—faster employment growth during general expansions and slower employment growth during general contractions.
Figure 1 shows that during the 1960s, 70s, and 80s, the US financial-services sector was a structural employment gainer relative to the total US economy, while during the 1950s and the 1990s (during the Internet boom) the sector did not consistently create relatively more jobs than the US economy as a whole, but instead exhibited stabilizing countercyclical characteristics—it grew faster than the rest of the economy during contraction periods and slower during expansions. However, as mentioned above, during the most recent business cycle the US financial-services sector has dropped into the structural loss category, with lower employment growth relatively to the total US economy during both the most recent expansion (November 2001 to December 2007) and contraction (December 2007 to the present).
Figure 2 provides more detail, breaking down the financial-services sector into its constituent parts and looking at the employment changes for individual subsectors during the most recent business cycle. The size of the bubbles indicates the relative employment weight of individual subsectors.
Figure 2 Structural and cyclical employment trends in the financial activities sector, by detailed industry
Source: Author, based on BLS CES data.
Figure 2 shows that the financial-services sector, which in the aggregate is experiencing net structural employment losses (the large dotted-line bubble is for the aggregate sector), includes diverse individual industries that are located in all four quadrants of figure 2. In this more-detailed analysis the subsectors of Depository Credit Intermediation5 (which includes commercial banks, savings institutions, and credit unions); Commercial Banking;and Funds, Trusts, and Other Financial Vehicles6 (a sector dominated by pension funds, but also including health and welfare funds and other insurance and investment pools and funds) are still experiencing structural employment gains, despite the overall downturn of the aggregate financial sector. In contrast, there are structural net employment losses in the Securities, Commodity Contracts, and Other Financial Investments and Related Activities7 subsector and in the Nondepository and Activities Related to Credit Intermediation8 subsector. The former subsector essentially equals Wall Street, and includes many of the industries at the heart of the current global economic crisis, such as investment banking and securities dealing, securities brokerage, commodity contracts dealing and brokerage, securities and commodities exchanges, portfolio and asset management, and investment advisory and financial investment activities. A similar pattern occurs in the Nondepository and Activities Related to Credit Intermediation subsector, which includes other crisis-related sectors, such as credit card issuance, consumer lending, real estate financing, and mortgage loan brokerage. The structural shrinking of these sectors in the US economy seems to have already begun.
The intense structural net employment losses in the Rental and Leasing Services9 subsector during the current cycle are not surprising, considering that this sector includes industries, such as rental cars and trucks and video tape rental (Blockbuster etc.), that have recently moved heavily toward Internet-based services provision in recent years. Finally, it is also hardly surprising that the Real Estate industry (which includes lessors, agents, and brokers)10 during the most recent cycle has been a procyclical services industry, while Insurance Carriers and Related Activities,11 a sector with a relatively stable market (AIG excluded), is countercyclical.
The bottom line is that the US financial-services industry is a sector in structural decline as a whole, as is Wall Street. Many of the jobs currently being lost in these sectors seem unlikely to return in the future. "Good riddance," some might say, after so many hundreds of billions of taxpayer dollars in bailouts to these very sectors. But perhaps we should be careful what we wish for here. It is far from clear, if the relative structural employment decline in the US financial-services sector were to persist or even accelerate, where unemployed financial-sector workers would turn for jobs. And where are large numbers of similar highly paid and skilled services-sector jobs going to be created in the United States (and especially the United Kingdom) in the future?
Creative destruction has always been seen by economists as a natural and, on balance, healthy part of the US economy (much more so than in many European countries) because there has always been something new to fill the void left by failing industries. This will hopefully continue in the future. At the same time, we are seeing a change from earlier long-term trends in the US economy when sectors filled with highly paid services-sector jobs such as those in financial services join the long-suffering manufacturing sector in structural employment decline. The comfortable notion that the US economy and its jobs are shifting away from manufacturing and into services will have to be revised as some of these former destination sectors go into decline as well.
1. Posen and Hinterschweiger have convincingly shown that only a small fraction of the trillions of dollars trading in derivatives in recent years actually involved nonfinancial parties and companies.
2. E. L. Groshen, and S. Potter, 2003, Has Structural Change Contributed to a Jobless Recovery? in Current Issues in Economics and Finance 9, no. 8 (August).
3. This equals the so-called BLS supersector Financial Activities, with sectoral data available going back to the 1940s. This supersector is comprised of NAICS 52, "Finance and Insurance," and NAICS 53, "Real Estate and Rental and Leasing."
4. My forthcoming Peterson Institute for International Economics working paper explains this methodology in detail.
5. This sector equals NAICS 522, "Credit Intermediation and Related Activities."
6. This sector equals NAICS 525, "Funds, Trusts, and Other Financial Vehicles."
7. This sector equals NAICS 523 "Securities, Commodity Contracts, and Other Financial Investments and Related Activities."
8. This sector contains NAICS 5222, "Nondepository Credit Intermediation," and NAICS 5223, "Activities Related to Credit Intermediation."
9. This sector equals NAICS 532, "Rental and Leasing Services."
10. This sector equals NAICS 531, "Real Estate."
11. This sector equals NAICS 524, "Insurance Carriers and Related Activities."