Finance vs. Econ Salaries, What a Difference One Field Exam Makes!
How much do new assistant professors make at AACSB B-schools? Here are the data for 2005-2006 from AACSB, these are national means for new hires:
1. Finance $111,000
2. Accounting $104,200
3. Marketing $89,300
4. Management $88,900
5. Operations $87,500
6. MIS $87,400
7. Quant $75,100
8. Economics $71,900
It is interesting to me that there is almost a $40,000 difference in starting salaries between economics and finance. Especially after just aquiring lots of information from interviewing 40 finance candidates at the Financial Management Association conference in Salt Lake City for a finance position at the Flint campus of the University of Michigan. I asked a lot of candidates about the amount of economics they take in graduate PhD programs in finance, and was surprised to find out that many PhD programs in finance are actually about 50% economics, in terms of the courses they take. Many PhD programs in finance require students to take graduate macro (one or two semesters), graduate micro (one or two semesters), and between 2-4 econometrics classes, and sometimes a class in Math Econ. In fact, many finance PhDs take preliminary examinations in economics. Therefore, in reality, finance PhDs basically get a PhD in economics with a field specialization in finance.
Further, I found it interesting that most finance PhD programs are very small, they only admit a few students per year in many cases, compared to large entering classes in economics PhD programs (25 is typical for econ at UM Ann Arbor), and most finance PhD programs can be completed in 4 years, vs. 5 years for many/most economics programs (another reason to get a PhD in finance vs. economics). The small number or PhDs in finance vs. economics explains a lot of the salary differential.
Maybe more economics PhD programs should offer fields in finance-related fields like financial economics, capital markets, asset pricing, financial markets, futures and options, international finance, etc., so that PhD students in economics could capture that $40,000 additional starting pay if they can penetrate the finance market for academics. Over a 35-year career, that would be additional lifetime income of close to $1.5 million (ignorning discounting), seems like it would be worth it.
It is easy to explain the $29,000 difference in starting salaries between economics and accounting, because they are two fairly different subjects/fields. But how to explain the $40,000 difference in two disciplines that are almost exactly the same? Market inefficiency? Comments welcome on this issue.
My advice for those considering PhDs in economics: Switch to finance if you have any interest in finance-related topics. You will still get to take a full year of PhD-level economics (micro, marco and econometrics), and you just specialize in finance instead of monetary economics and industrial organization (like I did!).
7 Comments:
The accounting average would be higher, except many of the positions have gone unfilled, or have been filled with temporaries or retirees. No amount of money can hire people who do not exist.
So if you have the courage and can tolerate boredom get a PhD in accounting.
Perhaps if business schools were allowed to compete globally for professors, the starting salary would decrease and students' tuition would decrease correspondingly. With the current EB-1 and Outstanding Researcher/Outstanding professor constraints from the US Immigration Department, the US PhDs have a protected job market because of complex and strict immigration laws. Accordingly, the supply is artificially limited, the demand is artificially increased, and an above market salary exists.
If the US middle-class workers are expected to compete globally in the abstract theory of free-markets, why shouldn't the professional ranks do the same? I guess there are two diametrically opposed groups at work here: Those who write the laws and those who have to live by the laws.
About 2/3 of the finance PhD candidates I spoke to were international students from Turkey, Argentina, China, India, Bangladesh, Vietnam, Russia, Thailand, Singapore, Malyasia, Mauritius, etc. (who attended US universities). Likewise, about 2/3 of the School of Management faculty at UM-Flint is foreign-born: India, Turkey, Taiwan, China, Iran, Bangladesh and Korea. If we had to rely on only American faculty in sciences, engineering, math, and business disciplines, there would be a real shortage of professors, much higher salaries, and much higher tuition.
If the demand for PhD finance professors is so high, why aren't the US colleges allowing more finance PhD candidates? You said they only admit a few each year; not that only a few applied. It seems like a shortage is strategically planned. Why so?
Yes, I noticed the foreign names in the UM-Flint's School of Management. According to the US Immigration and Custom's website, only highly qualified immigrants are offered the chance to secure visas to teach in the US. These professors must be the top of their class, and are held to a higher standard than their US counterparts. I'm sure we are lucky to have them at the college.
Variation in college professors' salaries is primarily determined by opportunity costs. Finance professors have a higher opportunity cost of teaching, compared to philosophy professors or history professors. Finance professors also have a higher opporunity cost than economics professors, which explains a large part of the differential.
Opportunity cost makes a lot of sense in determining compensation; it also hits close to home with me. I left Baker College of Owosso for UM-Flint this semester because I received a better overall package. Baker has since made me a better offer, but I've made a commitment for now.
We spoke in another place about an "education premium." I have confidence in that concept.
Mark, I don't know if you and I crossed paths at GMU - which is NOT in Washington, DC, but in Fairfax, VA - but this post describes exactly why I decided to walk across the hallway from Economics to Finance. I earned my MA in Economics at GMU back when Don Lavoie was still alive and before Victor Vanberg went back to Germany to assume Friedrich Hayek's old chair. I left academia for a decade to heed the Sirens' call of the dot.com boom [bubble], and later returned to complete my PhD.
$70K... $125K...? $70K... $125K...?
Basically, Economics is its own disproof; it fails the market test, as your post indicates. You see almost no want ads for economists, and oodles and oodles of want ads for financial analysts, risk managers, and the like.
Economics professors are quick to point out that Finance is Applied Microeconomics with a little Accounting thrown in, but it is not. It is a different mindset, similar to the difference between Catholicism and Calvinism; both are 'Christian' and yet very, very, very different. Economics is a social science that is fixated on equilibrium (yes, yes, even if your field is Austrian Economics, you still have to address the Equilibrium Question). Finance is an applied art that is all about arbitrage.
Finance : Economics :: Engineering : Theoretical Physics
There are no schools of thought in Finance in the same way that there are schools of thought in Economics. If you have eight economists in a room, you will have nine opposing points of view. If you have eight financial analysts in a room, all will agree that profit maximization is a good thing, and they will be standing in line at the keg making fun of the economists.
That having been said, if you are an Economics professor, and you are experiencing paycheck envy - and, yes, mine is bigger than yours - look into the AACSB Bridge Programs. Google it. If you can get your articles published in the top Finance journals, then you should be drawing a grown-up salary, and not one of those anemic little Economics paychecks.
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