The compensating differential for university professors

I love my job. I honestly have the best job in the world [*]. Now, there is a serious problem inherent in those statements. It isn't that we shouldn't love our jobs. Every one of us deserves to do a job that we love. The problem is that, when we do a job that we love, we are willing to do so for a much lower wage than we could earn in a job that we didn't love nearly as much.

This is what economists refer to as a compensating differential. Consider two jobs that are similar in almost all ways, except that one job has some attractive non-monetary characteristics (e.g. it is a job that is pleasant, fun, and/or clean), while the other job has unattractive non-monetary characteristics (e.g. it is a job that is unpleasant, boring, and/or dirty). More people will be willing to do the first job. This leads to a higher supply of labour for that job, which leads to lower equilibrium wages. In contrast, fewer people will be willing to do the second 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 unattractive job that fewer people want to do is the compensating differential.

Is there a compensating differential for university professors? According to this 2018 article by Daniel Hamermesh (Barnard College), published in the journal Economics of Education Review (ungated earlier version here), there is, and it is substantial. Using data from the American Community Survey for 2012-2016, and comparing workers with doctorates working in academia with workers with doctorates working in other occupations, Hamermesh finds that:

Comparing pay differences at various quantiles of the distributions, near the bottom of the pay distributions academics earn more than other doctorate-holders; but the differences rise steadily as we move up the earnings distributions, with academics’ pay beginning to fall below that of other doctorate-holders at the 17th percentiles of the distributions. At the 25th percentiles of the distributions the earnings advantage has turned into a disadvantage of 6%; at the medians it is 19%; and it rises to an astounding 50% disadvantage at the 95th percentiles. At the means academics receive 24% lower pay than non-academic doctorate-holders...

University professors get paid less than doctorate-holders in other occupations. The mean difference is US$29,802 (US$121,704 vs. US$91,902), and the difference at the 95th percentile is a staggering $196,594 (US$394,058 vs. US$197,464). Controlling for various demographics, the mean difference in pay is 17 percent.

This suggests an incredibly large compensating differential for being a university professor. What explains it? Hamermesh looks at the flexibility of work timing using a simple utility model calibrated to data from the American Time Use Survey, and concludes that:

Under what seem like reasonable assumptions about utility a not tiny, but also not huge part of the earnings differential can be explained by the more equal distribution of leisure across days of the week that academics enjoy.

To be more specific, time flexibility can explain no more than a quarter of the difference in pay between university professors and other doctorate-holders. Hamermesh then looks at data from a survey of 288 academic economists, which asked which aspects of their job contributes most to their enjoyment of being a professor. The survey results show that:

Freedom and novelty of research, and the satisfaction of working with young minds, are by far the most important attractions of academe, listed by 88 and 74% of survey respondents respectively. Only 36% of respondents listed time flexibility as a top-three attraction, slightly fewer than listed enjoying intellectual and social interactions with colleagues.

University professors are poorly paid compared to workers with doctorates in other occupations. The compensating differential here appears to capture how much professors value the freedom and novelty of doing their own research, and the thrill and inspiration that comes from working with students. I totally buy into that argument. I love my job.

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[*] Important note to my employer: Nothing in this post should be taken as an indication that I don't deserve to be paid way more than my current salary.