As the federal government has piled new regulations on the financial system, lower-skilled employees have been forced out of the industry—a tradeoff that hasn’t necessarily helped consumers.
“It’s just raising the costs,” Christos Makridis, a scholar with the Mercatus Center, a free market think tank at George Mason University, tells Reason.
Makridis is one of the authors of a new study, along with Alberto Rossi, that investigates an under-acknowledged effect of federal regulations on the financial services sector imposed since the Great Recession. More regulation has brought increased automation, and lower-skilled workers have been pushed out as firms seek to hire fewer but more highly-specialized science, technology, engineering, and mathematics (STEM) workers.
The study notes that regulations on the financial services sector have increased significantly more in recent years than regulations on other businesses. The Dodd-Frank bill, which was passed in the wake of the 2008 financial collapse and, among other things, created the new Consumer Financial Protection Bureau, is one of the main culprits.
In the report, Makridis and Rossi say that the financial services sector has seen a 50 percent increase in regulation between 2008 and 2017. For every 10 percent increase in regulation, STEM employment increases by 5.3 percent, they report. The study also found that increases in regulation caused wages to increase, as financial firms hired fewer people working for more money.
“Financial services firms may have sought to ‘escape’ regulatory exposure by hiring STEM workers who could automate more tasks and pursue activities outside the scope of existing regulation,” the report concludes.
Older, more established firms have the ability to weather more of these expensive new regulations. Big banks have the resources to hire the legal teams that let them dodge regulatory restrictions while smaller ones don’t.
Despite the Obama administration’s desire to make the financial services sector more resilient when economic downturns happen, Makridis notes, “the surge in regulation that occurred from the Dodd-Frank legislation led to heightened polarization in the labor market where firms responded by hiring more STEM workers and firing a lot of non-STEM workers, middle- and lower-skilled jobs.” Big banks respond to regulation by automation, and as a consequence replace lower-skilled workers with people who have greater technical skills and are thus able to operate these automated systems.
The banking system might be more secure, but a lot of former workers in the industry probably aren’t.