The Growth of Finance

D uring the last 30 years, the fi nancial services sector has grown enormously. This growth is apparent whether one measures the fi nancial sector by its share of GDP, by the quantity of fi nancial assets, by employment, or by average wages. At its peak in 2006, the fi nancial services sector contributed 8.3 percent to US GDP, compared to 4.9 percent in 1980 and 2.8 percent in 1950. The contribution to GDP is measured by the US Bureau of Economic Analysis (BEA) as value-added, which can be calculated either as fi nancial sector revenues minus nonwage inputs, or equivalently as profi ts plus compensation. Figure 1, following the methodology of Philippon (2012) and constructed from a variety of historical sources, shows that that the fi nancial sector share of GDP increased at a faster rate since 1980 (13 basis points of GDP per annum) than it did in the prior 30 years (7 basis points of GDP per annum). The growth of fi nancial services since 1980 accounted for more than a quarter of the growth of the services sector as a whole. Figure 1 shows