The calculations showed, for example, that if the number of people in finance in Canada were to fall back to the turning point, GDP per worker would rise by 1.3 percentage points. For Switzerland the gain would be 0.7 percentage points and for Ireland 0.2 percentage points.
“The case of Ireland is interesting because over the period from 1995 to 1999, the Irish financial sector’s share in total employment was 3.84 percent — very close to the growth-maximizing value. But over the next 10 years, the share rose to more than 5 percent,” they said.
If the share had been constant at 3.84 percent, the growth of output per worker could have been up to 0.4 percentage points higher over the last 10 years.
The economists came up with a second “quite striking” discovery: “The faster the financial sector grows, the slower the economy as a whole grows.”
To demonstrate their findings, they gave the examples of the “extreme cases” Ireland and Spain.
“During the five years beginning in 2005, Irish and Spanish financial sector employment grew at an average rate of 4.1 percent and 1.4 percent per year, while output per worker fell by 2.7 percent and 1.4 percent, respectively,” they said.
“Our estimates imply that if financial sector employment had been constant in these two countries, it would have shaved 1.4 percentage points from the decline in Ireland and 0.6 percentage points in Spain,” they added.
“In other words, by our reckoning financial sector growth accounts for one third of the decline in Irish output per worker and 40 percent of the drop in Spanish output per worker,” they said.
They said: “Overall the lesson is that big and fast-growing financial sectors can be very costly for the rest of the economy.”
The report was written against a background of some evidence that finance has lost its shine for people going to university, and for those emerging as graduates, in advanced economies.
At the height of the pre-crises boom in financial services, the sector was sucking in many people with high skills in mathematics and financial engineering, known as “quants,” for astronomical salaries.