Tuesday, June 19, 2007

Pay Inequity - Doesn't exist!

Last night, I posted about the "high" pay of financial analysts, and someone posted a comment about how "the priorities of our country" seems a bit askew.

That post bothered me because it implied somehow that the pay for i-bankers was in line with what they did, because the starting pay for teachers is a lot less.

I hate these comparisons because it ignores basic economic principles of supply and demand.

The classic economic question that is relevant here is:
What's worth more? A bucket of gold or a bucket of water?

Most would jump and say gold, follow by a incredulous look and a snide comment about how dumb the questioner is.

But let's consider the context. You've been wandering the desert for 3 days, and you're thirsty. Do you want a bucket of gold or a bucket of water now?

The fact is, as you get more of something, each additional item, referred to as the marginal value, diminishes. Water in general is worth very little, since there is so much of it, while gold is scarce, and therefore valuable. But the cost of water does not suggest that water is not a necessity to life.

The same applies to teachers and i-bankers. Given no teachers and no i-bankers, no one would question the need for teachers before i-bankers. Teachers provide an important service. But, as the number of teachers increase, each additional teacher begins to lose value compared to the value of one more i-banker.

Additionally, the difference between a teacher and i-banker is significant in terms of training, hours worked, and job security.

Training-wise, teachers are given large amounts of scholarships and other educational incentives, while i-bankers spend much of their own capital and borrow to learn their trade.

While teachers definitely work hard, typically teachers would work no more 10 hours a day, and rarely on weekends or during the summer time. I-bankers on the other hand work at least 12 hours a day, and routinely work on weekends and during the summer time.

Finally, an average teacher can hold onto their position for life. For an i-banker, average performance allows for about 2-3 years of work, before they are forced out.

Please understand, I am not saying teachers should be living in poverty. Rather, I am suggesting that the market is efficient, and that teachers are being paid what the market will bear. And while it is easy heart-wrenching to report the low $20K salaries of first-year teachers, my MBA professors are being paid at least $150-$200K for teaching 4 classes a year, while having summer-time off to do other things.

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