Flocking to Finance

Recent graduates may take for granted the migration of one-fifth of their classmates into finance-sector jobs, but things haven’t always been this way. In a survey of 6,500 Harvard graduates from selected classes between 1969 and 1992, Claudia Goldin and Lawrence F. Katz—Lee professor of economics and Allison professor of economics, respectively—found that the percentage of graduates who choose to work in finance has increased drastically over time.

Among those who graduated around 1970, 22 percent of the men were in finance or management 15 years later. Among those who graduated around 1990, the figure was 38 percent. The proportion of male graduates working in finance alone increased from 5 percent to 15 percent during the same period. And a Harvard Crimson survey last year found that among graduating seniors heading straight to work—roughly three-quarters of the class of 2007 —58 percent of the men were headed for finance or consulting, and more than 20 percent of all men for investment banks.

Similar changes were apparent for women, but in smaller numbers. It was these gender differences that Katz and Goldin set out to study with their survey, dubbed “Harvard and Beyond,” conducted in 2006 and 2007. Men still command higher salaries, on average, than women with the same educational attainment, and even in some cases with the same type of job; this appears to be due to women’s preference for family-friendly jobs and employers (see “Girl Power: What’s Changed for Women and What Hasn’t,” January-February, page 34). Goldin is the author of Understanding the Gender Gap: An Economic History of American Women, and the two previously collaborated on a study of the role of the birth-control pill vis-à-vis women’s decisions regarding career and marriage.

But the new survey also turned up plenty of other things, including the size of the shift into finance, and the reason for that shift. For the entire respondent pool, across all occupations, the median income for men was $162,000, and for women $90,000; graduates working in finance earned nearly three times that median, in a pool of people already paid far more than average. (Among the general U.S. population in 2006, men’s median income was just over $42,000, and women’s was under $33,000.)

Finance’s extremely high compensation has lured Harvard graduates who might otherwise have pursued law or medicine: the prevalence of those fields, combined, declined from 39 percent to 30 percent between the two cohorts. Although some of those employed in finance have M.B.A.s, many of the jobs, unlike those in law and medicine, require no advanced degree.

This pattern among Harvard graduates reflects a similar pattern in the wider society. The finance sector’s contribution to the U.S. gross domestic product swelled from 4.4 percent in 1977 to 7.7 percent, or roughly $950 billion, in 2005, according to a report on the survey by Wall Street Journal columnist David Wessel. One of every 13 dollars of employee compensation in the United States today goes to people working in finance, the column noted, and in 2004, the combined income of the top 25 hedge-fund managers exceeded the combined income of the CEOs of all Standard & Poor’s 500 companies.

Wessel concluded that the astronomical rise in finance-sector salaries has fueled income inequality in the United States. He also diagnosed a finance-sector salary bubble, akin to the tech-stock bubble and the housing-price bubble. Bubbles, of course, inevitably burst.

Katz and Goldin are less certain about a correction. The field cannot sustain the rate of growth it’s experienced in the last three decades, but neither is it going to return to its 1980 state, Katz says. He says the growth was, in part, a consequence of economic trends—such as the opening of world markets—so the fields won’t shrink unless those trends reverse themselves.

Goldin says this is a familiar story being repeated with a new set of characters. “If we were discussing this 100 years ago,” she says, “we would be talking about the relative decline of the clergy, and we would be lamenting the fact that our best students weren’t going into it. After all, this institution was founded on preparing men for the clergy. We would be throwing names like Carnegie and Rockefeller around, and we would be saying, ‘This is a world of greed! Where’s the salvation?’”

More remarkable than the growth of finance, Katz and Goldin say, is the fact that Harvard graduates, with all the options open to them, still decide to pursue careers in the arts, the nonprofit sector, and academia. “We can only infer,” says Katz, “that lots of people, by making the choice not to do one thing, even though that thing has a very high pecuniary return, put enormous value on something else.”

Read more articles by: Elizabeth Gudrais

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