The financial services sector's share of the US economy was 2.8% in 1950. It grew to 4.9% in 1980 and it rose to 8.3% in 2006. The growth in the financial sector has been accompanied by a decline in labor's share of national income. Labors share of national income was much higher in the 50's-70's and it has fallen by 12% since 2001. A study by the UN found that financialization explained 46% of labor's falling share of income. Globalization explained only 19% of the loss in labor's share.
The growth in the financial industry might be a good think if it contributed to a growing economy. Most of the research on this topic suggests that it does not. The fees paid to the financial sector appear to skim profits away from the real economy and reduce the level of investment.
The growth in the financial services sector also contributes to income inequality. The average income in the financial services sector is 70% higher than the average income in the remaining sectors. The high wages also attract a larger share of our best educated young people to the financial services sector. The opportunity to earn large incomes attracts a lot of potential scientists, engineers and doctors into a sector of the economy that does not add value to the overall economy.
Its hard to determine what to do about this growing problem. Economists are becoming more aware of the problem, but policy makers in Washington have not paid any attention to it.