Dodd-Frank Is Driving the Wrong Kind of Innovation

The federal government responded to the 2008 mortgage crisis by piling new regulations on the financial system, but lower-skilled finance employees were squeezed out of the job market.

As the federal government responded to the 2008 mortgage crisis by piling new regulations on the financial system, a new study reports, lower-skilled finance employees were replaced by workers with degrees in science, technology, engineering, and mathematics (STEM).

Christos Makridis and Alberto Rossi, researchers with George Mason University's Mercatus Center, found evidence that "financial services firms may have sought to 'escape' regulatory exposure by hiring STEM workers who could automate more tasks and pursue activities outside the scope of existing regulation." The influx of STEM workers and ensuing automation following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act may have "productivity-enhancing effects," they note. But "this has come at the expense of low- and middle-skilled workers in the sector."

The tradeoff has not necessarily helped consumers. "It's just raising the costs," Makridis says.

According to the paper, the financial services sector saw a 50 percent increase in federal regulation from 2008 to 2017. For every 10 percent increase in regulation, STEM employment increased by 5.3 percent. Makridis and Rossi also reported that "a 10 percent rise in regulatory restrictions is associated with an 8.69 percent rise in employment among compliance officer occupations (even after controlling for STEM workers)."

The study found that increases in federal regulation caused average wages to increase as financial firms hired fewer people and paid them higher salaries, which implies that lower-skilled workers were squeezed out of the job market. Whether or not the banking system is more secure, a lot of former workers in the industry probably aren't.