What's Driving Rising Wall Street Layoffs?

Most people might not find fewer bankers a troubling prospect, but financial sector firings won't help Main Street

Most people might not find fewer bankers a troubling prospect, but financial sector firings won't help Main Street

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Although they probably won't garner a lot of sympathy from most Americans, bankers are being laid off in higher numbers this year. From January through May, the financial sector cut 11,413 jobs. That's a 21% increase over last year's tally of 9,431 over the same period, according to outplacement company Challenger, Gray & Christmas, Inc. Should this concern us?

While many Americans won't be all that sad to hear about Wall Street layoffs, they should be. Often, financial sector layoffs foreshadow broader layoffs in the economy, for reasons explained here. So if these cuts are occurring because firms' expect weaker profits -- or losses -- going forward due to the economy slowing down, then these layoffs are a very worrying indicator.

But that's not the only possible reason for more layoffs. Challenger, Gray & Christmas provides a couple of other possibilities. One could be the new financial regulation. Some new rules are beginning to take effect. If they cut into profits, then banks will slash jobs.

In another very specific way, new regulation may be causing layoffs. New compensation rules are causing labor costs to rise. Banks are increasing salaries and shrinking bonuses. If they cannot as freely utilize incentive as for compensation, then they'll have to pay the lower performers more and cut their employee pool accordingly. I spoke with a banker last night whose firm is naming this reason for its recent layoffs.

The final possibility is that merger activity is shrinking jobs. Challenger, Gray & Christmas points to the recent announced acquisition of Royal Bank of Canada's U.S. retail bank* by PNC Financial Services, in particular. Although such mergers generally advertise few layoffs, there's almost always some redundancy that needs to be remedied by getting rid of workers doing the same job. As financial industry mergers heat up, layoffs will inevitably follow.

So on one hand, financial industry layoffs might not be entirely indicative of economic slowdown. But that doesn't mean they're good for the recovery. If thousands of financial sector workers are hitting the job market, then those currently unemployed will find it even harder to find work. Most of the individuals coming from banks or other financial services firms are highly educated and very competitive in the job force. While they often land on their feet, their quick job turnover will prolong the unemployment of others.

Of course, there's also the larger problem of the effect on U.S. economic growth of the financial industry shrinking. Finance is one of the few industries where the U.S. has had a distinct edge over the past decade. As it shrinks, broader economic growth will be more challenging as the U.S. attempts to compete in less profitable sectors like manufacturing, in which other nations might have labor cost or other advantages.

*Note: Initially, I indicated that PNC purchased RBC, but it only purchased its U.S. operations. The sentence was revised to clarify this point. Of course, the logic that follows still holds.