23 April 2019

The problem in finance is not social mobility, it’s economic geography

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A new report from accounting giant KPMG appears to reveal that Britain is a country of multi-generational jobs.

The firm are particularly concerned about the fact that many more people follow their parents into the finance industry than do with other occupations.

Indeed, the figures are remarkable: some 40 per cent of those in finance have parents in that industry, compared to just 12 per cent of the time in other ways of making a living. The worry is that we’re perhaps approaching some Hindu-like caste system, where who Poppa was condemns us to a life of economic stratification.

The report has some other interesting info too – it details how some 65 per cent of us all would not consider working in finance at all. And among those who do over a third said they were mostly in it for the money.

The fact the work is viewed as unpalatable to many goes some way to explaining the high wages many in finance earn. To paraphrase Adam Smith, all jobs pay the same. That might sound bonkers, but Smith was using a rather broader definition of “pay” than many of us might recognise.

His point was that if it’s work people enjoy doing, which the young will flock to, the cash component of wages will be low and job satisfaction will be high. This explains why the vast majority of actors never make any cash at all. On the other hand, if the majority of the population would never do a job, then cash wages will understandably be higher.

As well as requiring long hours and some qualifications, finance also pays well because lots of people don’t want to do it. Good, that’s settled then.

Where the report goes wrong is in not considering the basics of economic geography in career choice. Not that this is a rare failing in this modern age.

We have reports about British inequality which entirely fail to note that it’s primarily a regional issue. Pay and living costs vary across regions in a manner unusual in other European societies. Whether that’s good or bad is another matter but that’s the cause of the country’s relatively high inequality numbers.

We have reports about the paucity of BAME people in highly paid positions which do not consider age cohorts. The non-white portion of Britain’s population is skewed towards the young, as mass immigration has been a relatively recent thing. This is not to consider the merits or not of the occurrence, but to point out that older people holding the top jobs is not a surprise. The BAME under-representation is at least partially just an effect of such age cohorts, discrimination against the young rather than on the basis of race.

Economic geography matters, we simply cannot make sense of the reality around us without noting it. For example, some years ago the ASHE – the listing of wages sliced by ethnic group, age, gender and so on – showed that the best paid gender/ethnic grouping in the country was black women.

This is not what we would expect. The reason was that black women near overwhelmingly lived in London, where wages are significantly higher than the rest of the country. Other possible slices by race or gender were not as concentrated in an area with high incomes, so had lower average wages.

Economic geography matters when trying to make sense of reality and the numbers we use to illustrate it.

How does that apply to the finance industry? Casual observation will show us that it is concentrated in London and the south-east. Using a broad definition there are some 450,000 working in the sector in The City and its immediate environs alone. This means that rather a large number of parents work in said industry in said location. And given the preponderance of the industry in that geographic location when their children come to start work it’s not surprising many of them end up in the same industry.

That is, there is not some caste effect going on, just one of geographic concentration. It’s as unremarkable as noting that kids in pit villages used to end up down the mines, people from seaside towns became fishermen and residents of Bournville might consider making chocolate for a living.

Now, It’s possible to complain that the concentration of the finance industry into certain locations is a problem. Not one that I’d worry much over but still, it’s possibly logical. But to worry about people joining the predominant industry in their location, as their parents did, is plainly ridiculous. It just goes to show the importance of understanding economic geography as a guide to reality.

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute.