The U.S. financial growth between 1995 and 2006 certainly translated into record-high shareholder returns. Labor compensation returns were also dramatically high at the onset of the current crisis.Financial markets

Adrian Peralta-Alva

Chanont Banternghansa

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ￿ Number 27
T
he turmoil in the U.S. financial sector that began
around August 2007 has fueled the current economy-
wide recession. Indeed, many of the new economic
policies to ameliorate the effects of the recession are directed
toward financial institutions. To get a deeper perspective,
we look back at the trends in the financial sector’s total con-
tribution to gross domestic product—or its value added—
and the distribution of this income between labor and
shareholders.
The “value added” of the financial sector measures the
value of the services provided by this sector to the overall
economy. We see a strong, sustained increase in the con-
tribution of the financial sector’s value added—as the most
noticeable postwar trend in the ratio of the financial sector’s
to the nonfinancial sector’s value added. This ratio changed
from 1/20 in 1952 to 1/6 around its peak in 2006. This five-
decade-long increasing trend culminated with a sharp 14
percent drop from 2007 to 2008.
The fractions of value added accruing to labor and
shareholders are summarized in the chart. (Data on value
added accrued to labor are reported quarterly, whereas
data on value added accrued to shareholders are annual.)
National Bureau of Economic Research–dated recessions
are shaded.
Shareholder income is the residual of value added after
covering for labor costs, corporate taxes, and investment
expenditures. The two most salient features of shareholder
income in financial corporations are marked by wide
shifts: First, shareholder income decreased dramatically
during the early 1960s followed by a two-decade-long
The U.S. Financial Sector’s Value Added:
Trends Now and Then
Chanont Banternghansa, Research Associate
Adrian Peralta-Alva, Economist
The U.S. financial growth between
1995 and 2006 certainly translated
into record-high shareholder returns.
Labor compensation returns were 
also dramatically high at the onset 
of the current crisis.
–0.05
0.00
0.05
0.10
0.15
0.20
0.25
1950 1958 1966 1974 1982 1990 1998 2006
Capital Income Share (!nancial)
0.45
0.50
0.55
0.60
0.65
0.70
0.75
1950 1958 1966 1974 1982 1990 1998 2006
Capital Income Share (non!nancial)
Labor Income Share (!nancial)
Labor Income Share (non!nancial)
Value Added Accruing to Labor and Shareholdersstagnation (in fact, this share fluctuated around zero from
1965 to 1975). Second, it experienced unprecedented growth
from the mid-1990s to the present. By 2007, this share had
risen to twice its previous high point. More than half of
this increase can be attributed to lower investment and the
remainder to increased profitability of the financial sector.
Shareholder income (relative to value added) in the nonfi-
nancial corporate sector declined substantially during the
mid-1970s as well but has not displayed any specific trend
since the late 1980s.
What about the share of total labor compensation in
value added? As the right panel of the chart shows, in the
financial sector this share tends to increase at the begin-
ning of each recession (by 2.15 percent on average), only
to drop by a larger amount (–3.8 percent on average) later
in the cycle. The labor compensation share in nonfinancial
corporations behaves similarly up to the mid-1980s. Since
then recessions have instead been associated with a drop in
the labor share of nonfinancial corporations. Perhaps most
curious is that the labor share for financial corporations
skyrocketed in the current crisis. It increased by 44 percent—
from 0.50 in mid-2007 to a record-high of 0.72—by the end
of 2008. Why such a big shift? Labor compensation did
not change much while value added declined dramatically.
The U.S. financial sector increased substantially during
the past five decades. Growth between 1995 and 2006 cer-
tainly translated into record-high shareholder returns. Labor
compensation returns in the financial sector were also
dramatically high at the onset of the current crisis. ￿
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on June 10, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

The U.S. financial sector's value added: trends now and then

http://research.stlouisfed.org/publications/es/09/ES0927.pdf

The U.S. financial sector's value added: trends now and then

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics