Monday, December 6, 2010

Why Wall Street Compensation Is So High

Economic theory indicates that wages reflect labors contribution to revenue. The theory is basically correct. Average compensation on Wall Street is high because labor productivity is high.
This article explains why Wall Street labor is so productive. The short answer is oligopoly. There is little or no price competition, and the prices that Wall Street charges for its services, in relation to the dollar value of its services, seems small to its customers. Pearlstein provides an example in which the average hourly price charged for a deal is $3,000. This should attract a lot of competition from start-ups seeking such high profits but the Wall Street banks have established relationships with its major customers that discourages competition. Consequently, four or five very large banks share the profits of the industry.

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