The compensating differential for being an academic

It seems obvious that wages differ between different occupations. There are many explanations for why, such as differences in productivity between workers in different occupations. However, there are also less obvious explanations. Or at least, explanations that are less obvious until you start to recognise them (after which, you start to see them everywhere). One such explanation is what economists refer to as compensating differentials.

Consider the same job in two different locations. If the job in the first location has attractive non-monetary characteristics (e.g. it is in an area that has high amenity value, where people like to live), then more people will be willing to do that job. This leads to a higher supply of labour for that job, which leads to lower equilibrium wages. In contrast, if the job in the second area has negative non-monetary characteristics (e.g. it is in an area with lower amenity value, where fewer people like to live), then fewer people will be willing to do that job. This leads to a lower supply of labour for that job, which leads to higher equilibrium wages. The difference in wages between the attractive job that lots of people want to do and the dangerous job that fewer people want to do is the compensating differential.

So to summarise, jobs that have highly positive characteristics will have lower wages than otherwise identical jobs with less positive characteristics. Now let's consider a specific example. Academics in many fields could probably earn substantially more if they worked in the private sector, than what they earn as an academic. For some fields (like finance, economics, accounting, computer science, or engineering), the differential is much higher than others (like education or anthropology). Why don't academics simply shift en masse into the private sector? Is that partially a result of compensating differentials?

A NBER Working Paper from earlier this year (ungated version here) by Daniel Hamermesh (Barnard College, and author of the excellent book Beauty Pays: Why Attractive People are More Successful, which I reviewed here), goes some way towards addressing the latter question. Using data from the U.S. Current Population Survey for 2012-2016, Hamermesh finds that:

...the adjusted pay difference between professors and other advanced-degree-holders shows a disadvantage of about 13 percent.

In other words, holding other factors (like demographic and economic characteristics) constant, academics earn 13 percent less than holders of a PhD (or EdD) degree in other jobs. At the median (the middle of the wage distribution), the difference is 16 percent.

Many people argue that academics like their jobs because they have more flexible use of their time (or, as I have fallaciously heard, that we have a sweet job because we only have to work when students are on campus). Using data from the American Time Use Survey 2003-2015, Hamermesh finds that:

...professors do much more of their work on weekends than do other advanced-degree-holders, and they do less during weekdays. They put in nearly 50 percent more worktime on weekends than other highly-educated workers (and 50 percent more than less-educated workers too). Professors spread their work effort more evenly over the week than other advanced-degree-holders...

...the spreading of professors’ work time across the week can account for nearly five percentage points of the wage differential, i.e., almost one-third of the earnings difference at the median...

So, more flexibility in work schedules accounts for part of the difference, but not all. Hamermesh also supports this with the results from a survey of 289 academics who specialise in the study of labour markets (I guess this was Hamermesh surveying people he knew would respond to a survey from him!). The survey shows that:

[f]reedom and novelty of research, and the satisfaction of working with young minds, are by far the most important attractions into academe. Only 41 percent of respondents listed time flexibility as a top-three attraction, slightly fewer than listed enjoying intellectual and social interactions with colleagues.

Clearly there are a number of characteristics that make academia an attractive job proposition for well-educated people who could get a higher-paying job in the private sector. Academics are willing to give up some income (and in some cases substantial income) for those characteristics - what they are giving up is largely a compensating differential.

[HT: Marginal Revolution, back in January]