Market Forces in Academia: Returns to Education and Faculty Pay

We study long-run trends in faculty compensation in the U.S. and Canada using a new panel covering more than 300,000 professors across roughly 1,500 universities. We document three patterns. First, dispersion in faculty pay across disciplines has grown sharply over the past 50 years: economics, business, and especially finance now command much higher salaries than other fields. Second, faculty wages are strongly linked to the earnings of their students: at the university–field level, a 10% increase in graduates' wages is associated with a 4–7% increase in faculty pay. Third, high-paying fields are characterised by more students per faculty member and a lower supply of PhD graduates per professor.

We show that the increasing inequality in faculty pay is driven primarily by heterogeneity in this elasticity of faculty wages to student earnings, rather than by differences in outside industry options for faculty. Our results point to market forces within academia—competition among universities for faculty in high-return fields—as the key driver of contemporary academic wage patterns.