Market Forces in Academia: Returns to Education and Faculty Pay

We examine long-term trends in faculty compensation and its underlying drivers in North America, using a comprehensive administrative dataset covering most research institutions. We document three primary facts. First, wage dispersion across academic fields has widened significantly over the past 50 years, with economics, business, and especially finance exhibiting a large and growing premium. Second, faculty wages are strongly and positively correlated with their students' post-graduation earnings across fields. Third, the relative supply of PhD students varies also substantially across fields, with high paying fields training relatively fewer PhD students. Using granular data on student earnings at the university-field-year level, we estimate the elasticity of faculty pay with respect to students' post-graduation earnings to be around 0.7. This elasticity varies significantly across fields and has increased over time. Our results align with a model of occupational choice, where higher industry wages simultaneously increase demand for faculty, through greater student enrollment and university revenues, and raise the opportunity cost of doctoral training in corresponding fields. Field-specific frictions further shape how this labor market tightening translates into faculty wages. Overall, our findings illustrate how academic wages are increasingly shaped by broader labor market dynamics, with field-specific responsiveness amplifying the transmission of private-sector wage differentials into growing faculty pay dispersion.