The modern era has witnessed a dramatic increase in wage inequality across the developed world since the late 1990s. While previous assumptions might have predicted that Europe could resist such forces, Sciences Po researcher Olivier Godechot of MaxPo and the OSC finds that France, too, has fallen prey to increasing inequality.
His research shows that finance professionals are largely to blame and can be justifiably seen as the “bad guys” who hold financial firms hostage by demanding large bonuses, threatening to move key assets to competitors if they do not get what they want.
Interview with Olivier Godechot, author of Financialization Is Marketization! A Study of the Respective Impacts of Various Dimensions of Financialization on the Increase in Global Inequality.
What do you mean by “financialization” and why is it important?
Olivier Godechot: The concept of financialization is multi-dimensional. It can refer to the growth of the financial sector as a whole, or of financial market activities only, or go beyond the finance sector to the financialization of non-financial institutions, firms or households. I show that when measured through its impact on inequality, financialization is primarily a phenomenon of marketization, which I propose to define as the increase in social activity devoted to trade in securities on financial markets. Contrary to previous scholarship inspired by Marxist or heterodox economics, which generally focused on macro-social mechanisms in terms of financial regimes, power resources, and global bargaining power, I try to go further by pinning down the precise mechanisms at stake within the financial labor market.
Has inequality been on the rise only in “Anglo-liberal” economies, or is continental Europe affected too
OG: With the complete individual wage data that I used in my article, it is possible to assess the development of inequality in France very accurately, and to break it down so as to measure the part played by finance. Contrary to the view put forward by social scientists, who generally consider France to be a good example of stability in inequality over the last 30 years, the data show a sharp surge at the very top of the wage distribution in the mid-1990s. The top 0.1 percent increased its share of the total wage bill by 0.85 percentage point, moving up to 1.1 percent in 1996 and 1.95 percent in 2007. Half of this increase is for the top 0.01 percent.
Which sectors accounted for most of the increase in inequality?
OG: In order to break down this increase in inequality, I calculated the evolution of the overall wage share of France’s top 0.1 percent of earners, working in finance, service to business, entertainment, and other sectors. I found that finance contributed 48 percent of the rise in the share of the top 0.1 percent, whereas service to business and other sectors each contributed just under 23 percent, and entertainment only 8 percent. When moving into the top 0.01 percent, I found that finance made a 57-percent contribution to the increase in the share of the working rich. The impact of finance on the increase of the top 1 percent remains high, with a contribution of around 40 percent.
Which aspect of financialization had the largest effect on growing inequality in your study?
OG: When I broke down the financial sector effect, I found that the increase in inequality was mainly driven by the increase in the volume of stocks traded in national stock exchanges and by the volume of shares held as assets in banks’ balance sheets. On the other hand, the financialization of non-financial firms and households does not play a significant role.
So what can we make of the popular response to the effects that you show in your research?
OG: The “Occupy” movement of 2011, which condemned inequalities with the slogan “We are the 99 percent” and occupied sites that symbolised financial power (Zuccotti Park next to Wall Street, Saint Paul’s cathedral in London, La Défense in Paris), was ultimately “right” to target finance as the catalyst and main symbol of the contemporary rise in inequality. My analysis clearly shows that finance has contributed heavily to this rise. Finance encourages polarisation in financial firms and the financial sector as a whole, in global financial cities, between these cities and the rest of their respective countries, in national economies and between these economies. As such, it constitutes a threat to social cohesion. Of all the risks incurred by the payment of bonuses in finance, the social risk is no doubt the most overlooked but certainly not the least important.
Finally, much has been made of the “bad guys” who are thought to hold the most responsibility for the growth of inequality. Can you tell us how this works?
OG: The link between finance and inequality is mainly due to the appearance of a rent on the financial markets and its appropriation by a minority. Its unequal distribution is now well understood. While some scholars try to explain high bonuses with the theory of superstars and winner-take-all phenomena, I have shown that finance professionals also have a hold over financial firms. They can effectively threaten to move key assets to competitors. However, the emergence of the global financial rent still needs further exploration. The financial deregulation of the past thirty years, which has created new markets, is probably one of its major drivers.