This decline in the bonus pool was a surprise to no one as most know that the finance industry had been hurting for a while. The securities industry had started to recover in early 2010 through April 2011, gaining almost 10,000 jobs after losing 28,000 in 2008 through 2009. But then the debt crisis in Europe froze the market last summer. Since then, securities employment has declined by 4,200 and more losses are expected in 2012.
The securities industry is still reeling from the Dodd-Frank regulations that were passed two years ago but have yet to be implemented. The biggest unresolved issue is the “Volcker Rule” that stipulates that firms cannot trade for their own account. Regulatory agencies, compliance officers and a staunch Wall Street lobby are still hashing out the details. Until more clarity on this issue is established, few expect job growth to resume.
Many regard the Wall Street bonus pool as the best indicator of Wall Street’s performance because it is not complicated by taxes (that can weigh on earnings reports) and still demonstrates how well the industry is doing overall.
Source: Office of the NY State Comptroller
For New York City, this indicator has the greatest impact because bonuses drive a lot of local economic activity from car sales and luxury goods markets to the residential condominium/co-op market. Current Wall Street employees not only have less to buy with this year but the outlook for them remains cloudy which may slow condo sales this year.
The local and state governments will also feel the impact from lower bonuses as Wall Street delivers a significant share of the tax revenues. A study I did two years ago estimated that the securities industry contributed more than 20% of all of the city tax revenues attributed to city employment and that tax revenues generated by the industry are approximately 6.5% of total wages. Applying this 6.5% to the $3.1 billion decline in bonuses equates to an approximate decline in tax revenues of $200 million. Ouch!
Although it should be noted that while the bonus pool was little changed from 2009 to 2010 before declining in 2011, total New York City tax revenues increased 5% and 10.8%, respectively, in fiscal years 2010 and 2011, according to Department of Finance data.
While the fiscal impact affects all of us, we should consider that this decline was expected and that the Mayor’s office of Management and Budget incorporates this expected decline into their revenue forecasts. Hopefully, other industries such as tourism and restaurants will make up this decline and the city will be able to manage its budget for the coming year.
Barbara Byrne Denham directs the Research Center at Eastern Consolidated and is the Editor of its three quarterly newsletters The MetroGrid Report, Manhattan Economic Indicators, and the Manhattan Commercial Property Sales Report; the monthly NYC Employment Alert; as well as a series of research reports, all of which are regularly cited in the Press.