GDP Per Capita and Private Equity Employment

December 3, 2012

Perhaps correlating private equity employment with the growth in Gross Domestic Product (GDP) per capita is a useless endeavor given all the assumptions and compounding factors that could influence the results, but here it goes.

The following figure represents the correlation between GDP per capita and private equity employment per capita.  The regression line going through the two data sets is a simple linear fit to the relationship between the two variables.  Not surprisingly, there’s a pretty strong correlation (R-squared is 0.82), with the p-value on the coefficient between the two at less than 0.0001 (highly statistically significant).  The coefficient comes out at 7,460,000,000.  The coefficient implies that for every 0.1 percent increase in private equity employment as a percentage of the population, we would expect GDP per capita to expand by $74,600 per person, or an almost doubling of what GDP per capita is today.  Of course, with PE employment per capita standing at 0.11% of total population today, and having 26been in the range of 0.007 percent and 0.012 percent over the past 22 years (my data goes back to 1990), it’s unlikely to expand to 0.21 percent of the population any time soon.

Interestingly, the high point of private equity employment as a percentage of the population maxed out about a decade ago in the first quarter of 2011.  Since then, PE employment as a percentage of the population has floated below 0.01 percent of the population for most of the 21st Century, with the boom years of 2007, 2008, and early 2009 as clear exceptions.  Not coincidentally, recent years of stagnant growth in private equity employment has coincided with the moderately poor growth in GDP per capita.

In addition to the aforementioned compounding factors problems, correlating GDP growth per capita with growth in private equity employment does not necessarily mean causation, something any questioning statistician will quickly remind an unprepared researcher.

Individuals convinced that private equity worsens the standard of living for most workers (GDP per capita) would have to argue that the positive correlation between GDP per capita and PE employment per capita is simply the result of good economic growth bringing in more non-useful financial professionals simply out to make a profit at the expense of the laborer.  Essentially, individuals with this view must think that private equity professionals are followers of the economic cycle rather than forward looking leaders in the course of the economic cycle.

On the other hand, individuals involved in the day to day activities of private equity professionals see the forward looking nature of industry professionals and take the correlating evidence that PE employment improves the standard of living of all individuals as a “well duh” type of observation.

In all, the growth in private equity employment is strongly correlated with the growth in GDP per capita.  The correlating evidence, though, does not confirm causation.  Without the ability to quantitatively confirm causation, the discussion of the importance of private equity depends on one’s interpretation of the correlating evidence.


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