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Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ■ Number 27

The U.S. Financial Sector’s Value Added:
Trends Now and Then
Chanont Banternghansa, Research Associate
Adrian Peralta-Alva, Economist
he turmoil in the U.S. financial sector that began
around August 2007 has fueled the current economywide recession. Indeed, many of the new economic
policies to ameliorate the effects of the recession are directed
toward financial institutions. To get a deeper perspective,
we look back at the trends in the financial sector’s total contribution to gross domestic product—or its value added—
and the distribution of this income between labor and
shareholders.
The “value added” of the financial sector measures the
value of the services provided by this sector to the overall
economy. We see a strong, sustained increase in the contribution of the financial sector’s value added—as the most
noticeable postwar trend in the ratio of the financial sector’s
to the nonfinancial sector’s value added. This ratio changed
from 1/20 in 1952 to 1/6 around its peak in 2006. This fivedecade-long increasing trend culminated with a sharp 14
percent drop from 2007 to 2008.
The fractions of value added accruing to labor and
shareholders are summarized in the chart. (Data on value

T

added accrued to labor are reported quarterly, whereas
data on value added accrued to shareholders are annual.)
National Bureau of Economic Research–dated recessions
are shaded.

The U.S. financial growth between
1995 and 2006 certainly translated
into record-high shareholder returns.
Labor compensation returns were
also dramatically high at the onset
of the current crisis.
Shareholder income is the residual of value added after
covering for labor costs, corporate taxes, and investment
expenditures. The two most salient features of shareholder
income in financial corporations are marked by wide
shifts: First, shareholder income decreased dramatically
during the early 1960s followed by a two-decade-long

Value Added Accruing to Labor and Shareholders
0.75

0.25

0.20

Capital Income Share (financial)
Capital Income Share (nonfinancial)

0.70

0.15

0.65

0.10

0.60

0.05

0.55

0.00

0.50

–0.05
1950

1958

1966

1974

1982

1990

1998

2006

0.45
1950

Labor Income Share (financial)
Labor Income Share (nonfinancial)
1958

1966

1974

1982

1990

1998

2006

Economic SYNOPSES

Federal Reserve Bank of St. Louis

stagnation (in fact, this share fluctuated around zero from
1965 to 1975). Second, it experienced unprecedented growth
from the mid-1990s to the present. By 2007, this share had
risen to twice its previous high point. More than half of
this increase can be attributed to lower investment and the
remainder to increased profitability of the financial sector.
Shareholder income (relative to value added) in the nonfinancial corporate sector declined substantially during the
mid-1970s as well but has not displayed any specific trend
since the late 1980s.
What about the share of total labor compensation in
value added? As the right panel of the chart shows, in the
financial sector this share tends to increase at the beginning of each recession (by 2.15 percent on average), only
to drop by a larger amount (–3.8 percent on average) later

2

in the cycle. The labor compensation share in nonfinancial
corporations behaves similarly up to the mid-1980s. Since
then recessions have instead been associated with a drop in
the labor share of nonfinancial corporations. Perhaps most
curious is that the labor share for financial corporations
skyrocketed in the current crisis. It increased by 44 percent—
from 0.50 in mid-2007 to a record-high of 0.72—by the end
of 2008. Why such a big shift? Labor compensation did
not change much while value added declined dramatically.
The U.S. financial sector increased substantially during
the past five decades. Growth between 1995 and 2006 certainly translated into record-high shareholder returns. Labor
compensation returns in the financial sector were also
dramatically high at the onset of the current crisis. ■

Posted on June 10, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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