New York City's economic dependence on Wall Street

Challenge, March-April, 1999

New York City's job growth has accelerated and is now very strong - the number of private jobs averaged 85,000 greater in 1998 than in 1997 - but real wage growth will also have to accelerate if the 1990s expansion is to match the 1980s. It should be kept in mind that real earnings growth was $38 billion between 1983 and 1988, much higher than the $22.4 billion increase from 1992 to 1997.

Wall Street Profits and Bonuses

The strong growth in Wall Street's earnings reflects the sizable growth in profits and bonuses over the last few years [ILLUSTRATION FOR FIGURE 4 OMITTED]. The industry has set new profits records in three of the last six years as the market indices have continued to move higher, buoyed by strong corporate profits, low interest rates, and subdued inflation. During 1997, Wall Street firms reported $12.2 billion in profits, more than twice their average for the start of the 1990s. These higher corporate earnings have also brought a considerable increase in year-end bonuses, which rose from $4.7 billion in 1992 to an estimated $12 billion in 1997. On an inflation-adjusted basis, this represents a gain of over 17 percent annually. Wall Street bonuses account for 60 percent of all bonuses paid in the city, and are substantial enough to make up nearly 7 percent of total citywide annual wages. This large stimulus is injected into the local economy in late December and early January of every year.

By every indicator, the securities industry has become substantially more lucrative in recent years. One of the main reasons is that the industry has benefited from a dramatic shift in financial activity away from the commercial banking sector Financial deregulation has shifted deposits away from banks and there has been a phenomenal rise in mutual funds and public-pension-fund equity holdings. Moreover, record merger-and-acquisition and underwriting activity in the 1990s has also contributed handsomely to the earnings of New York's Wall Street firms.

Wall Street's Total Impact on Jobs and Output Ripples over the Region

Employing a well-established economic model (the IMPLAN model based on detailed interindustry transactions data), we estimated the extent to which Wall Street has acted as a driver of other sectors of the local economy. Between 1995 and 1997, when securities industry revenues increased by 50 percent, employee compensation and profits soared on Wall Street. The total economic output accounted for by Wall Street rose from $50 billion in 1995 to $75 billion in 1997. Consequently, during this two-year period, Wall Street had a disproportionately large impact on total job creation in New York City.

Between 1995 and 1997, Wall Street firms themselves added about 9,800 jobs while citywide employment expanded by about 80,000. The model estimates that, through the indirect economic impacts of additional purchases of goods and services by Wall Street firms from other New York City companies during this period, Wall Street activity resulted in $1 billion in additional sales for suppliers. It also led to the creation of some 7,800 new jobs in industries such as legal services, accounting, computer processing, temporary-help agencies, and real estate.