Thursday, March 26, 2015

Wall Street Bonuses and America's Minimum Wage Earners

Recent news that the Wall Street banking system handed out bonuses totalling $28.5 billion to its 167,800 employees during 2014 is really not all that shocking, even when the bonuses are added to the average base salary of $190,970 (2013 average).  According to the New York State Comptroller, the average bonus paid in New York City's security industry rose by 2 percent in 2014, hitting $172,860 (or 3.3 times the median American household income in 2013) even though the industry was slightly less profitable in 2014 than it was in 2013.  This is the highest level of bonuses paid since the financial crisis.  In the two previous years, the average bonus rose by a total of 52 percent, far above the level in 2014.

A recent analysis from the Institute for Policy Studies helps to put the size of Wall Street's bonus pool into perspective in terms of those Americans who earn at the bottom of the nation's pay scale, America's minimum wage earners.  It is important to keep in mind that the creative minds of Wall Street were behind the near meltdown of the world's economy in 2008, largely because the system incentivizes high risk behaviours.

Here is a graphic showing the 2014 total annual earnings for the 1.007 million Americans earning the current federal minimum wage of $7.25 per hour:


During 2014, Wall Street bonuses totalled more than twice the total earnings of more than a million American minimum wage earners.

Let's frame the size of Wall Street's bonuses in terms of what it would do for millions of America's lowest paid workers who spend their working lives in restaurants, home health and personal care and the fast food industry:


The $28.5 billion would be nearly enough to raise the hourly wages of 1.5 million home health and personal care workers and 2.2 million fast food preparation and serving workers to the $15 per hour level.

As I have noted in a previous posting, while wealthy Americans can afford to purchase more goods than poorer Americans on an individual basis, on a group basis, the purchasing power of the less well off masses is substantially greater.  After all, how many toasters will one billionaire purchase compared to the number purchased by hundreds or thousands of middle class households?  Based on the standard fiscal multipliers used by Moody's Analytics, every dollar that goes into the pockets of lower-wage workers adds about $1.21 to the national economy compared to only $0.39 for high income earners.  As shown in this graphic, if the $28.5 billion in bonuses had been allocated to minimum wage earners, GDP in 2014 would have grown by $34.5 billion rather than the $11 billion when the entire bonus pool ends up in the wallets of Wall Streeters:


Interestingly, the New York State Comptroller notes that "...the cost of legal settlements related to the 2008 financial crisis continues to be a drag on Wall Street profits, but the securities industry remains profitable and well-compensated even as it adjusts to regulatory changes."   That said, after record losses during the financial crisis, the security industry has been profitable for six consecutive years, including the three best years on record.


Despite the fact that the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law on July 21, 2010, very little has been done to reign in the connection between bonuses and reckless, high risk behaviour.  Section 956, the section of Dodd Frank that requires "...enhanced disclosure of incentive-based compensation arrangements and prohibits covered financial institutions from offering incentive-based compensation arrangements that encourage covered persons to expose the institution to inappropriate risks by providing the covered persons excessive compensation" has still not been adopted.  With Wall Street's ever-growing bonus pool and its endless line of creative financial products, we could well be setting ourselves up for the next financial crisis.