Tuesday, June 9, 2009

Econ 101: Compensating Wage Differential

Right in the heart of Portland, I took this picture on a lovely Sunday walk. Can you guess where it is?
The fact that you might have trouble identifying it is testament to the fact that the city is blessed with an abundance of natural forested parklands.

Of course Oregon in general is a beautiful place, and as someone who relishes the gray damp wonder that is the Oregon winter, I get a lot of utility from living here. Because of my strong preference for living in Oregon, I accepted a job that payed considerably less than competing offers I had - in the most dramatic case about 50% less than what a big midwestern state university was offering.

Economists call this a compensating wage differential: the extra money you have to pay to get people to accept unpleasant jobs or the lower salaries you have to offer to people for particularly pleasant jobs. You may have to pay more then for a person who pumps septic tanks all day than someone who delivers flowers. It is a simple idea, you have to compensate people for the difference in the disutility of doing different jobs.

Politicians love to say that it is okay that salaries in Oregon's state universities are much lower than other places because of this: Oregon is such a wonderful place to live that talented academics will come anyway. There is some truth to this statement, but Oregon isn't the only place to live and the population of people like me who are willing to accept much less to be here is pretty small. For instance I was offered quite a bit more to go to a university in a lovely seaside California town - I don't suspect many would have made the decision I did. So, yes, economic theory suggests that Oregon can get away with slightly lower salaries, but there is a limit.

As I talk to some OSU students who are graduating and who have more than one job prospect, I emphasize that they should look past raw salary differentials and think hard about how much they will enjoy the work they will do in each job and ask themselves, how much is the extra pleasure of working at a particular place worth in terms of salary?  What I am telling them, in other words, is figure out your personal compensating wage differential. 

Good luck grads!


Fred Thompson said...

There are also substantial differences in cost of living from place to place. For people with moderately high incomes that means housing costs, the price of services, and taxes. It is not inconceivable that the cost of living was 50 percent higher or more in a beachfront community in CA than in Eugene, Corvallis, or Portland. At that point it really does resolve to locational preferences.

Having said that, I would also note that rankings of OR's Research I state universities have been very slowly declining for the past 50 years. The wage discrepancy is probably the main reason.

MPPBrian said...

When I was an undergrad I was on a committee that was grappling with the issue of passing a student fee increase to increase the pay of physicians at the Student Health Service. We looked at physician pay at the other PAC 10 universities, and OSU was paying the lowest. Not surprisingly, universities in high cost areas like UW and UC Berkeley paid very high salaries, but so did universities like WSU (located in Pullman in eastern Washington). We surmised that WSU had to pay more to get doctors to move to such a rural area. UO in Eugene was paying about 15% more than OSU was, so we decided that we needed to at least keep up with UO, which has similar cost of living and quality of life, so we phased in the increases over three years.

There is no question that Oregon universities get away with paying less because of quality of life - but I feel like too often that is used as an excuse. Ultimately, we have to be competitive with the market place - that doesn't mean paying the most, but at least paying close enough to averages so we can have successful searches that attract a variety of high quality candidates. Another issue is that in the past Oregon was able to compensate for lower salaries with a very generous public pension system. New hires receive a less valuable pension under reforms instituted in 2005. When he was speaking on OPB's Think Out Loud radio show earlier this year, Dave Frohnmayer (outgoing Pres. of UO) mentioned that one of the things that keeps him up at night is our low faculty salaries. Unfortunately, given the state's budget situation I'm not sure much can be done on this for the next couple years.

Dann Cutter said...

It is not just low faculty salaries, but that of staff employees as well. Over 13 years in services in IT at OSU, I am pretty consistently outmatched by new grad salaries.

Now, I love Oregon, and with the exception of a stint in Florida in the Navy have lived here all my life; but the continual use of this reasoning when looking at parity in salaries gets a bit overused. As well, this seems to be the goto excuse during peak times, and takes second stage to the 'Oregon funding' argument during poor times.

Fundamentally, while this discussion has drifted away a bit from Patrick's main and valid point certainly for the Portland and I suspect various other Oregon areas, in regards to academia, there is a real disconnect between the value placed by lipservice both in the administration and in the funding political structure.

I have yet to see the real value of a strong academic institution in Oregon appreciated, and honestly, before OSU turned its football program around, it got very little interest outside of purely academic circles. Until Oregon and University officials make a commitment to addressing wage disparity, instead of funding buzz word programming, I can't help but see a continual decline in Oregon university growth.

Why did I stay? I'll have to think on that one... likely, momentum.

NickJenkins said...

I agree that something as seemingly small as where you live makes a huge difference. After all, it's not just your career, it's your life - and being in an environment you enjoy is priceless. A large salary as a finance man is a small consolation to someone who hates New York and hates finance. I think more people are becoming aware of "the power of small," and how less obvious details make all the difference. Personally, I've never been to Oregon. My version of this would be Austin.