Sunday, September 21, 2014

Why Do Financial Industry Employees In The UK Earn Higher Wages?

This study of the finance industry wage premium,  which has also been rising faster than wages in other sectors,  examines several factors which might explain the wage premium.  It found no evidence that cognitive skills account for the wage premium.  It concludes that profits are higher in the finance sector and that the profits are distributed among all of the employees.  For example, event planners in the finance industry are paid much more than event planners in other industries.

The obvious follow on to this study is to explain why profits are higher in the finance industry.  That is, why do their customers pay a premium for the services provided?  For example, pension funds in the US pay a premium to hedge fund managers who have not been able to produce above average returns over the last five years.  The largest pension fund in the US (CALPERS) has decided to eliminate its $3 billion investment in hedge funds.  Pension fund managers are not well suited to manage investments in hedge funds, but many are willing to pay high fees to hedge fund managers who have not earned their fees.  Investment managers know where the money is and they understand how decisions are made by pension funds.  They have figured out how to exploit the decision making process. 

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