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Economics Lesson - How Much is a Job Worth?


Colleges are in the news a lot these days, and generally not from a favorable perspective. One of the big issues has to do with college loans and the massive debt run up by some students. And this leads to the question: how much is a college degree worth? From a purely economic / financial perspective, a college degree is worth the present value of the additional earnings you will have over your lifetime relative to the earnings you would have had without that college degree.

So what is a job worth? What pay is appropriate for this job as opposed to that job? Some people think that the appropriate pay for a job can be determined objectively. This notion led to the concept of "comparable worth" (see definition in image below). Comparable worth was intended to increase the pay of women relative to men, the idea being that women were in jobs / fields that were just as "valuable" as the jobs / fields that men were in, but the women were deliberately paid less. Comparable worth tended to emphasize credentials and education over other factors - those advocating comparable worth tending to have lots of education and credentials!

Rather than beat around the bush, let me just come right out and say exactly what a job is worth. A job is worth what someone is willing to pay you to perform that job. It makes no difference how much schooling is required, or how "hard" the job is, though those can be factors. A job may be high paying because it takes many years to learn the necessary skills (e.g. a physician). It may be high paying because of the danger involved (e.g. underwater demolition expert). Or maybe it is just unpleasant. A job is going to pay what is necessary to attract someone with the necessary skills and the willingness to do the job.

Many people understand the role of supply and demand when it comes to prices for products and services. If supply is low and demand is high, the price will rise. This will reduce demand as some potential purchasers will decline to pay the higher price. At the same time, the higher price will encourage producers to increase their output and even have new producers get into the business. Similarly, if supply is high and demand is low, prices drop. Demand will increase as some will be attracted to the product at the lower price. Again, producers will react by lowering production or even getting out of the business altogether. The combination of supply and demand impacts the price of a product and that price change sends signals to both consumers and producers to respond appropriately and rationally.

Many fail to realize that we have exactly the same situation when it comes to jobs and salaries. Suppose there is a shortage of nurses? The only way to attract qualified candidates to the available jobs is to raise the pay (or provide other benefits). As the pay increase, more people will be attracted to the nursing field, so that within a period of time, there will be more qualified candidates for the positions available. Similarly, if there is a surplus of nurses relative to the positions available, pay might decrease (though more likely it will remain stagnant) and some nurses will lose their jobs. This makes nursing less attractive. Some planning on a nursing career may switch to a more lucrative field. Some already in nursing may leave for a different field. Eventually, things will level out. Job pay, as determined by the free market, sends signals to both businesses and workers - what fields are in demand (we need more workers) and which are not (we need fewer workers). Note that if a business is forced to pay more than they consider that job to be worth (I'm talking about minimum wages, here), they will find a way around it; via automation, using fewer but more highly skilled workers, or simply getting out of the business.

I believe it was Oregon that tried out comparable worth for government positions. It didn't work. For example, they deemed that a "word processing clerk" was worth more than a "secretary" because of the required computer skills. It didn't take long before they had a shortage of secretaries. They couldn't raise the pay for secretaries because that was "objectively" determined by comparable worth. The solution? Reclassify many secretarial positions as "word processing clerks," so they could be paid more and attract candidates.

Remember, a college degree is only worth what someone is willing to pay someone with that degree. Seven years of undergraduate and graduate work in "Women's Studies" is simply not woth what a four year engineering degree is worth.

End of lesson.


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