Market Forces in Academia : Student Future Earnings and Faculty Pay

Abstract

A long time series of individual faculty wages across public and private four-year institutions in the U.S. and Canada reveals increasing pay heterogeneity across disciplines, with economics - and especially finance - emerging as well-compensated fields. We identify a causal relationship between student future earnings and faculty compensation that significantly contributes to this trend. Using a shift-share instrument based on persistent university student placement patterns across locations and industries, we estimate elasticities of faculty compensation to student earnings after graduation, finding notably higher elasticities in business and finance. Our findings suggest that differences in student enrollment per faculty and faculty bargaining power likely drive this variation in elasticity across fields.