Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.
In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge. On a related note, see our recent Free Exchange on how bank lending has become more focused on residential property.
Vćri áhugavert ađ sjá hlutfalliđ á Íslandi fyrir og eftir hrun.
Ţađ er langt síđan ég talađi um sóun á doktorsgráđum ţegar snillingarnir fóru í bankana en ţađ var meira á tilfinningalegum forsendum hjá mér!
(via Hacker News)