FRBSF Economic Letter
99-15; April 30, 1999
 Economic
Letter Index
Employment and Wages in California's Financial Services Sector
The U.S. financial services industryespecially bankinghas undergone
substantial technological change and industry restructuring during the
1990s. A variety of new techniques and services have been introduced in
all areas of the financial services sector, and industry restructuring
through mergers and consolidation has been a defining feature of the banking
industry in recent years. Merger activity has been especially notable
in California, with several high-profile mergers of large banks in recent
years symbolizing the trend. California also stands out as a state where
restructuring has resulted in a contraction in bank offices.
Through their effects on cost, quality, and the types of services provided,
technological change and industry restructuring are likely to generate
gains for stockholders and customers. Such effects have been the primary
focus of existing research on the restructuring of the financial services
industries. Far less attention has been paid to the implications for employment,
despite the possible impact of technological change and industry consolidation
on the number and mix of jobs.
In this Economic Letter, I examine recent trends in employment
and wages in California's financial services sector. I focus largely on
the banking sector, in which some of the most significant and widespread
changes have occurred. Comparison of the trends in California and the
nation as a whole provides some perspective on the roles of technological
change and industry restructuring in the determination of employment and
wage changes. The evidence suggests that these factors have reduced employment
at California banks, although wage and salary payments for workers remaining
in this sector have risen rapidly in recent years.
Technology and changes in industry structure
During the 1990s, the financial services industries, especially commercial
banking, experienced pronounced shifts in the techniques by which their
services are produced and distributed as new computer technology and related
information-processing technologies were developed. The most prominent
example is the widespread proliferation and use of ATMs as outlets for
routine consumer banking transactions. Other examples that apply to routine
transactions include increased reliance on point-of-sale debit transactions
using bank cards, the growth of in-store branches, and increased availability
and use of banking by phone and personal computer (Morisi 1996, Laderman
and Martinez 1998). Banks have instituted other labor-saving technological
advances as well. One example is credit scoring, a statistically based
method for evaluating loan applications and expected repayment performance,
which increasingly is being applied to consumer and business loans.
In addition to any direct effects on employment, these changes in technology
may affect employment indirectly by providing incentives for bank mergers
and mergers between banks and other providers of financial services. Some
technological changes create production techniques with a substantial
"fixed-cost" component: the costs largely take the form of an up-front
outlay, with relatively low additional costs per customer served. This
raises the optimal scale of output and potential benefits associated with
mergers. Alternatively, the introduction of new technologies may widen
banks' markets, in geographic and product terms; mergers and acquisitions
may be the low-cost option for expansion into the new market segments.
Such technological and structural changes tend to reduce the need for
traditional "brick and mortar" bank offices through replacement by automated
and centralized facilities. In recent years, these forces have been powerful
in California. The number of branches of commercial banks in California
fell 15% between 1991 and 1997, from about 5,000 to 4,300. (This number
includes the many in-store branches located in supermarkets and other
retail stores.) In contrast, for the nation as a whole, the number of
bank branches rose 15% between 1991 and 1997, from about 52,400 to 60,300.
Potential effects on employment and wages
There are several avenues by which technological change and industry
restructuring can affect employment and wages. The most obvious is the
reduced need for bank staffespecially tellersdue to a reduction in branching.
Also, mergers are likely to create redundancy in operational areas shared
by the entities that join, thereby requiring the elimination of positions
and separation of the employees who filled them. In turn, reduced demand
for workers whose skills are tailored to the financial services sector
will create excess supply of these workers and place downward pressure
on their wages within the sector.
On the other hand, some aspects of changing technology and industry structure
may tend to increase employment and wages. To exploit nascent increases
in the optimal scale or scope of production enabled by new technologies,
banks may need to expand employment following mergers, particularly if
the resulting combination of assets is more productive. Regarding wages,
the mix of workers may shift towards those with more rather than less
investment in skills, or the productivity of existing workers may rise.
For example, ATM machines directly substitute for bank tellers, who are
at the lower end of bank salary scales. This reduces the share of low-wage
workers in the banking sector. Moreover, the technological changes that
underlie convergence may improve the productivity of the workers managing
the information flow in new financial conglomerates, or require that workers
hired have greater skills than in the past (Demsetz 1997).
On net, technological change and restructuring in the financial services
industry have ambiguous effects on employment and wage growth. It is difficult
to separate out the effects of changing technology and industry restructuring
because they are closely related. However, comparing employment and wage
trends between California and the nation as a whole will provide some
perspective regarding the effect of the restructuring of branch networks.
Employment effects in California and the
nation
Figure 1 shows payroll employment
in the broad finance sector and in the depository institution subsector
for California and the nation; each series is measured relative to its
value in January 1989, which is normalized to equal 100. (Banks account
for about three-fourths of employment at depository institutions, with
thrifts and credit unions accounting for the remainder.) Employment growth
in the finance sector was reduced by the 1990-91 recession, and as of
late 1993 it was about at its 1989 level, in California and nationwide.
Finance sector employment in California fell precipitously during 1994
and early 1995. This declineabout 45,000 jobs, or nearly 12% of the finance
sector totallargely was due to a sharp contraction in mortgage banking
and escrow-related jobs. Finance employment nationally fell for the same
reason, but by a much smaller percentage than in California; the losses
in California constituted more than 40% of the losses nationwide during
this period.
The figure shows that a key restraining factor for job growth in the
finance sector has been declining employment among depository institutions
(which account for just over half of all finance jobs). The number of
these jobs nationwide declined steadily during the first half of the 1990s.
From the peak of nearly 2.3 million jobs in August 1989, about 250,000
(just over 10%) were lost by the end of 1995, with virtually no growth
since then. The decline in California was steeper and has continued into
1999. From a peak of 275,000 jobs as of May 1990, about 60,000 (22%) had
been lost by the end of 1995, and over 10,000 have been lost since then.
As of January 1999, employment at California depository institutions had
fallen 26% relative to the 1990 peak.
In contrast to the loss of jobs at depository institutions, employment
gains have been rapid in other finance subsectors in recent years. On
a yearly basis, employment growth in the nation's finance sector excluding
depository institutions was 8½% during 1995-97, and for California the
corresponding growth rate was nearly 13%. These gains more than offset
losses among depository institutions during this period. As of February
1999, finance sector employment nationally was about 11% above its level
from January 1989. In California, recent job gains recovered most of the
jobs lost earlier in the 1990s, although employment in the state's finance
sector remained slightly below its mid-1990 peak (by 2,300 jobs, or about
one-half percentage point).
These figures suggest that consolidation in branch networks and other
adjustments in California's banking sector have taken a toll on bank employment.
In percentage terms, the employment decline at California depository institutions
during the 1990s was just over twice as large as the national decline
(22% versus 10%). On the other hand, recent strength in other finance
sectors has largely offset employment declines in banking. Employment
growth in these other sectors reflects the tremendous surge of activity
in financial markets in recent years, which in turn was enabled by improvements
in information-processing technology similar to those that led to the
restructuring of the banking industry.
Wage effects in California and the nation
Have these changes also reduced wages and salary growth for employees
at depository institutions? Figure
2 displays real wage and salary payments per employee at depository
and nondepository institutions for the period 1989-97 (adjusted for inflation
using the GDP deflator for personal consumption expenditure). Although
we are unable to separate out nondepository institutions from depositories,
depository institutions account for about 2½ times as many jobs as nondepositories,
so the trends in wages and salaries in this broad sector are dominated
by employment at depositories.
In California, real yearly wage and salary payments per worker at depository
and nondepository institutions were nearly flat between 1989 and 1994,
rising by only 1.6%; for the nation, they rose about 5%. However, between
1994 and 1997, wage and salary payments for workers at depository and
nondepository institutions surged, rising 19% in California and 14% nationally.
(By comparison, in California and nationally, real wage and salary payments
per worker for all nonfarm industries were flat between 1989 and 1994
and rose 5.7% between 1994 and 1997.) On net, for the entire period 1989-97,
real wage and salary payments per worker in this sector rose 21% in California
and 20% nationally, so the salary gap between California and the rest
of the nation rose slightly.
The size and pattern of these changes suggest that following an initial
period of adjustment to rapid consolidation, salaries in this sector in
California have recovered. In fact, the underlying changes in industry
technology and structure may have provided the basis for the recent acceleration
of salary growth. On the other hand, the salary gains among depository
institutions have not been sufficiently large or rapid to offset declining
employment and raise total salary payments in this sector.
Conclusion
Employment at depository institutions fell substantially more in California
during the 1990s than in the United States as a whole. It is difficult
to disentangle the effects of technological innovation from effects due
to mergers per se. However, it appears that extensive restructuring of
branch networks and other adjustments in California substantially restrained
employment growth at California banks. Despite these employment reductions,
the employees who remained in the sector fared well: wage and salary payments
per employee at depository and nondepository institutions rose substantially
in the last few years, which suggests that employees in this sector benefited
from higher productivity techniques or were subject to upgrading of skill
requirements.
Rob Valletta
Senior Economist
References
Demsetz, Rebecca. 1997. "Human
Resource Needs in the Evolving Financial Sector." Federal Reserve
Bank of New York Current Issues in Economics 3 (November).
Laderman, Elizabeth, and Jennifer Martinez. 1998. "Trends in Twelfth
District Banking in 1997." FRBSF
Economic Letter 98-2,
January 23.
Morisi, Teresa L. 1996. "Commercial banking transformed by computer technology."
Monthly Labor Review 119 (August), pp. 30œ36.
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
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