Posted by David Belkin, June 8, 2010

Much has been made in recent months of last year’s record profits on Wall Street, the myriad ways (near-zero interest rates, bailouts, accounting rules changes) that government policy boosted those profits, and the seven or eight figure bonus packages that some Wall Street executives awarded themselves from those profits. There has been less said, however, about what happened to aggregate wages and salaries across the securities industry in New York City in 2009. Not only did wages fall, but the fall was the steepest in modern history—including the Great Depression.

Real average annual wages—including baseline salaries, cash bonuses, and exercised stock options—in the city’s securities industry slipped from $412,915 in 2007 to $396,370 in 2008, and then tumbled to $311,279 in 2009. (All amounts here and below are in constant 2009 dollars.) Adjusted for inflation, average wages in the securities industry plummeted 21.5 percent in 2009 and 24.6 percent over two years.

How could wages nose-dive in 2009 while Wall Street profits skyrocketed? First, most of last year’s wage decline reflected the industry’s crack-up in 2008: New York Stock Exchange member firms posting record losses, revenues dropping almost in half, and the year-end bonus pool shrinking in tandem—those bonus reductions were almost entirely felt in the first quarter of 2009. Real average bonus payments for the year as a whole fell 38.2 percent in 2009, on top of a 6.6 percent drop in 2008. It should be noted that bonuses measured here do not count grants of stock options; rather, reported wages include the gains realized on previously awarded options when they are exercised. But many options were “underwater” in 2009 due to the steep slide in the stock market, and this also depressed wages.

At the same time, while Wall Street profits surged in 2009, firm revenues did not recover. One result was continued pressure on employment—the securities industry lost 18,400 jobs in New York City in 2009, more than twice the decline over the course of 2008—and this appears to have weighed down baseline salary growth. The negative effects on options and salaries combined to reduce real average non-bonus wages in the city’s securities sector by 7.4 percent in 2009.

By comparison, securities industry job losses were much greater in the post-9/11 slump, but prior year bonuses and current year baseline salaries and option realizations never all fell at the same time. As a result, real average wages declined by “just” 10.1 percent in 2002 (and 11.2 percent over 2002 and 2003). Before that, there have been only three occasions since 1929 when real average securities wages fell by at least 10 percent in a year. None of these were during the Great Depression itself. That epoch was marked by drastically shrinking securities employment but surprisingly limited effect on industry average real wages; long-term stagnation rather than precipitous drops was the rule. There was much more securities wage volatility during the 1940s, a reflection of both wartime dislocations and two major bear markets. Trading controls may have also contributed to the steep postwar slide in real average wages, which included a nearly 18.0 percent decline in 1947. There was also a slightly larger than 10.0 percent drop in 1969—auguring the onset of the “Slow Crash” of the 1970s—and lastly a 13.7 percent dive in 1994, partly due to a crash in the bond markets that year, but mostly an artifact of a shift in the timing of bonus payments.

These episodes were all eclipsed in 2009. Also without modern precedent was the 29.4 percent plunge in real aggregate wages on Wall Street in 2009. Reflecting the combined effect of wage declines and layoffs, an estimated $21.4 billion in wages and salaries vanished in the city’s securities sector last year. Even in inflation-adjusted terms, the hit to aggregate industry wages last year was almost twice as large as in 2002.

But was the magnitude of last year’s wage drop actually just an effect of the prior years’ soaring—but ultimately insupportable—compensation growth? “What-goes-up…” may indeed be part of the explanation. However, workers on Wall Street saw their real average wages rise by $64,000 at the peak of the DotCom boom in 2000-2001, and then gave back 50 percent of those gains ($32,000) during the 2002-2003 slump. Over 2006-2007 real average wages grew by almost $100,400—and in 2008-2009, over 100 percent of those gains ($101,600) evaporated. Perhaps what has happened in the past two years can be viewed as a correction to the entire era.

What would a less lucrative but also less volatile securities industry, one that did not generate cycles of frenzied wage growth but also was less susceptible to catastrophic meltdowns of earnings, have meant for New York City’s economy? Just how lucrative and how volatile can be seen from the fact that from 1990-2009 there were nine years of double-digit percent increases in securities real average wages (including a high of +36.0 percent in 1992) and three of double-digit percent decreases (the worst was the -21.5 percent in 2009), all this yielding 5.4 percent annual average real growth over the whole period.

In the rest of the city’s financial sector (banking and insurance), by contrast, there were four years of double-digit real wage growth (the highest +14.5 percent in 1999) and no years of double digit decline (the worst, last year, was -6.8 percent), and annual average real growth over the period was 4.1 percent. Outside of finance, annual New York City private sector real wage growth averaged 1.6 percent, and never exceeded +6.2 percent (2000) or fell below -2.5 percent (2009) in any year.

So a securities industry that, from 1990 on, grew compensation at “merely” the robust pace of the rest of finance would have (all else being equal) delivered a much milder jolt to aggregate wages in 2009. But it would have also delivered much lower real aggregate wages—lower by $11.3 billion (22.0 percent) in 2009 and by an average of $15.7 billion (28.3 percent) per year over the past decade—than the securities wages actually paid in New York City.

This is just by way of illustration, but it does give something of the flavor of the challenge New York City could face adjusting to a securities industry that is unable to return to the kind of breakneck earnings growth it exhibited during the last 20 years—spectacular crashes and all. Just what kind of securities industry will emerge as Congress and regulators thrash out changes intended to protect borrowers, investors, and the broader economy is one of the great unknowns for both the city and the nation.