Economics majors and earnings: further exploration

post by JonahSinick · 2014-04-20T03:15:31.868Z · score: 8 (8 votes) · LW · GW · Legacy · 8 comments

Contents

  #1 Human capital acquisition
    Biases affecting reports of the usefulness of economics on the job
    Quotations from current economics majors
    Quotations from former economics majors
    Quotations from college economics departments
    Quotations from economists
    What employers say
    The starting salary vs. midcareer salary test
  #2 Acquisition of a desire to make money
    Increased selfishness?
    Subjective reports of the impact of majoring in economics on desire to make money
    Comparison of majors and nonmajors
  #3 Pre-existing ability as measured by tests
    Average economic returns associated with higher SAT scores, and relative SAT scores of economics majors
  Based on this data, there's a lot of uncertainty as to how much of the wage gap comes from ability as measured by standardized tests. But the wage gap can't be fully explained by differences in pre-existing ability as measured by standardized test scores. Consider the case of economics vs. political science, where economics majors make 20% more. If one assumes that a 50 point increase in math SAT increases income by 6%, and that economics majors have math SAT 75 points higher than political science majors, then one finds that pre-existing ability as measured by standardized tests would predict a 9% wage gap, which is substantially less than 20%.
  Comparison with graduates of elite colleges
  #4 Pre-existing desire to make money
    Higher rates of selfishness?
    Evidence about the influence of financial motivations on major selection
  #5 Signaling
    The fact that economics majors make more is a signal that they're better employees
    Employer surveys
    Quotations from economics departments
    Quotations from economists
    Quotations from former college students
    Wall Street Oasis forum threads 
    The starting salary vs. midcareer salary test
  Other explanatory hypotheses
None
8 comments

In Earnings of economics majors: general considerations I presented data showing that economics majors make substantially more money (20%-50%+) than majors in other liberal arts. I gave five hypotheses, each of which could partially account for the wage gap. These are possible differences between the majors in:

  1. Human capital acquisition.
  2. Acquisition of a desire to make money.
  3. Pre-existing ability as measured by tests.
  4. Pre-existing desire to make money.
  5. Signaling.

I discussed a priori reasons for believing that they might be significant, and how one might go about testing the hypotheses and the extent to which they explain the wage gap.

Having examined available data, I believe that with the possible exception of #3, based on publicly available information, there's a huge amount of uncertainty as to the roles of these factors in explaining the wage gap. In many cases there is data suggesting the presence of effects, but the data is not robust and the sizes of the effects are entirely unclear. Furthermore, the hypotheses are not exhaustive: other factors (such as those mentioned at the very end of this post) plausibly play a role, making it difficult to reason in the fashion "factors A, B and C play very small roles, therefore factor D must play a large role." 

I was originally hoping that there would be a simple, clearcut case for or against majoring in economics increasing earnings (relative to other liberal arts), but resolving the question would seem to be a major research project. Still, I hope that this post can help students who are contemplating majoring in economics or another liberal art get a feel for the "lay of the land," and some of the points therein may be actionable for particular individuals. 

I'll address each hypothesis in turn.

This post is very long. If you're short on time or attention, consider scanning over the subtopic headings and reading the sections that look most interesting. As usual, I'd appreciate any relevant thoughts, particularly if you're a former economics major.

#1 Human capital acquisition

Biases affecting reports of the usefulness of economics on the job

People's opinions vary concerning how useful knowledge of economics is on the job. It's difficult to assess the veracity of their views:

Quotations from current economics majors

Some quotations from a message board thread on College Confidential. Note that at least two of the commenters hadn't yet graduated from college at the time when they wrote.

From VMadden

Econ teaches you a lot of math which is very useful for careers in finance or accounting. The problem is that most of the later econ courses are highly theoretical and, therefore, not very appropriate to real life.

From onhcetum

It's a bunch of theoretical ********. I am about four classes away from graduating, and I still haven't learned crap. I know the basics of supply and demand and the relationship between the unemployment rate and inflation and GDP, but not a whole else.

From econoboy

Economics is an interesting field of study (like most social sciences) but it's also (like most social sciences) not marketable and very academic in nature. Economics makes many simplifying assumptions about human behavior that in reality makes it very unrealistic. I'm getting ready to graduate college feeling like I have learned a lot and had a good well-rounded education but I'm also sitting here thinking to myself - "What am I going to do for a career?" I just put in 4 years of school and I honestly don't feel much more marketable than a high school graduate.

Quotations from former economics majors

I had difficulty finding relevant quotations from former economics majors, who are the ones who would be best equipped to make an assessment.

Found on the thread Why you should major in Economics at College Confidential:

”Pooja Jotwani, a recent graduate of Georgetown University in Washington D.C., [...] says the major strengthened her business skills and provided her with something very simple: "financial security."”

[...]

”I work at the corporate headquarters of Mervyn's as a financial analyst and internal auditor. None of my work relates to the material I studied as an undergrad, but that does not imply that my economics degree provides little value. As I have found from my own recruiting experience, an economics degree enjoys a great deal of respect because of exposure to issues related to the economy and thus business, as well as the analytical thinking that underlies economics.”

[...]

”I am now in Law School at Harvard. Nowadays, an Economics degree is one of the most helpful degrees to have for an entering law student. In my experience, it is the only academic non-legal subject that every substantive introductory law class teaches; every class thereafter assumes one has an understanding of economics.

[...]

Well considering that I'm currently a Marketing intern for a video game company... and am working on marketing campaigns for a THQ game and several MMOs, I would say the Econ major on my resume didn't hold me back from it. Also, the other marketing intern here is an Econ major from another school. Not going to say it helps for marketing, but it doesn't hurt.”

Quotations from college economics departments

A few representative statements below. These sources are obviously biased.

University of Houston

Your economics training provides you with a terrific set of job skills, and in fact the economics major provides you with virtually all of the top ten most important job skills [...] the graphs in economics represent quantitative concepts, and as an economics major you will certainly have no fear of graphs. Further, many classes use explicit numerical problem solving. You also have the opportunity to explicitly learn a wide range of statistical and computing tools [...] There is no better major for learning analytical problem solving than economics. [...] All of business is problem solving, and this is the expertise you have learned from the logical constructs in economics 

George Mason University

When you graduate with an economics degree, you will have a good understanding of the national economy and will be able to think critically about problems in the business world. You will also have good communication skills and skills in manipulating data and using computer technology. Thus you will be prepared for many careers. [...] Economics majors compete very well against most business majors for jobs in the business world. Many large corporations value the broad analytical training received by economics majors.

Smith College

Individuals with training in economics are well prepared for a variety of careers. In most cases, the rigor and precision of technical training in economics will give the graduate a competitive advantage.

Quotations from economists

As I mentioned in my original post, economist Bryan Caplan wrote:

In my experience, undergraduate econ majors learn only two skills they're likely to use in any job outside the Ivory Tower: (a) how to calculate a present discounted value, and (b) basic statistics. Except in top schools, I doubt most econ majors master either (a) or (b). The remainder of the economics curriculum simply isn't vocational.

Economist Greg Mankiw seems to think that majoring in economics increases earnings based on his blog post Why Major in Economics?. He doesn't give a causal pathway, but could think that a causal pathway is human capital acquisition (or signaling).

What employers say

Surveys of employers are focused around how desirable they find economics majors, and most of the ones that I've found don't separate out the extent to which economics majors are considered desirable because of what they learn in their economics major. But to the extent that employers want economics majors, it may be because of human capital acquisition, so employers wanting economics majors is evidence that employers think that economics majors acquire more human capital than usual, which is in turn (inconclusive) evidence that economics majors do in fact acquire more human capital than usual. For information on how desirable employers find economics majors, see the section of this post labelled "#5 Signaling". 

The report Economics Graduates’ Skills and Employability has some information on how employers who are hiring students for roles that utilize economics specifically feel about how well prepared their starting employees are.

The starting salary vs. midcareer salary test

In my earlier post, I suggested that by comparing the percent by which starting salary grows over the course of a career for economics majors vs. other majors, one can obtain evidence for or against majoring in economics increasing human capital (relative to other majors). Specifically, I said that an increase in human capital should become less significant in relative terms over time (e.g. because the amount of human capital that one gains on the job over a course of a career should dominate what one gains in college), so that if majoring in economics increased human capital, one would expect the percentage growth for economics majors to be lower than those of other majors.

Payscale's 2008 report gives the percentage increase from starting salary to midcareer salary by major:


Philosophy 103.5
Economics 96.8
PoliSci 91.7
History 81.1
English 70.3
Psychology 68.2
Sociology 59.5

By the logic of my earlier post, the fact that the figure for economics is higher than that of most liberal arts would seem to be evidence that economics builds less human capital than the other majors do.

There's a confounding factor: economics majors have higher starting salaries, and in general, outside of technical professions such as engineering, people with higher starting salaries may experience higher percentage growth. (For an example supporting this intuition, my impression is that there are elite finance firms where earnings go up by 300% over the course of their careers, even after taking into account people being laid off.)

To try to control for this factor, one could compare percentage growth by major with percentage growth figures for alumni of colleges with the same average starting salary as the major. The percentage growths for colleges with a fixed starting salary are highly variable, so employing this strategy would require detailed analysis. A cursory look at the data hints to me that the general effect of higher starting salary on percent increase of earnings is not high enough to fully account for economics majors having such a high percent increase relative to other majors. But since I haven't done a systematic analysis, I have low confidence in this.

So the fact that economics majors' salaries increase by a much larger percentage than the other majors aside from philosophy would seem (very tentatively) to be evidence against the hypothesis that economics majors make more money because majoring in economics builds human capital.

#2 Acquisition of a desire to make money

Here too, there's little data available.

Increased selfishness?

There are a number of psychology studies (see e.g. Does Studying Economics Breed Greed? and Are economists selfish? A lit review) that purport to associate studying economics with greed but:

Also, many of the studies don't distinguish between testing "studying economics causes greed" and testing "those who are greedy are more likely to study economics" (though a few do). 

Subjective reports of the impact of majoring in economics on desire to make money

One would like subjective reports of how studying economics altered students' desire to make money. My original post attracted some relevant comments at The Bill Fold, which I've pasted below. They are few, and may be unrepresentative.

moreadventurous: 

I don’t think majoring in Econ made me more selfish

sherlock:

I was an economics major, and I definitely have a desire to earn a high income. It’s an interesting question, whether or not the econ major influenced that, since I definitely didn’t feel that way coming into college. For me, I think that what changed was a much more acute awareness of what a raw deal everyone except the very highest earners are getting in this economy. Some of that came from studying economics in the midst of the great recession, sure, but I think the bigger factor was just experiencing the effects of income inequality firsthand in a way that I hadn’t before.

DebtOrAlive

I’m not convinced majoring in Econ increases selfishness so much as Econ majors (except those academia-bound) tend to be practical and focused on achieving at the very least a securely upper middle class lifestyle. [Looks around apt, looks outside at neighborhood, checks account balances] If it was supposed to make me more selfish, it didn’t exactly work, cause I’m not raking it in over here.

diplostreetmix

I would add that rather than increasing selfishness, a good Econ courseload should improve someone’s decision-making. You’ll wonder to yourself if you are being rational in your choices or maximizing your utility, which helps you decide what to do.

dude

Econ major here who chose a career in government, so to answer Mike’s question, no! Though I probably did use my Econ background to fully assess the relative merits of good salary + pension + benefits/number of hours per workweek. ;-)

Comparison of majors and nonmajors

As I said in my original post, one would like a comparison between majors of how desire for money evolves over the course of college. Such a study may exist, but I haven't been able to find it. The results of such a study would not be decisive: social desirability bias plausibly leads survey respondents to report that money matters less to them than it actually does, and a difference between economics majors and other majors could reflect different degrees of social desirability bias rather than different degrees of desire to make money.  

#3 Pre-existing ability as measured by tests

Here we have relatively good data. Economics majors score higher on standardized tests than other liberal arts majors do, and this can be expected to partially account for the wage gap, but the standardized test gap by itself isn't large enough to explain the wage gap.

Average economic returns associated with higher SAT scores, and relative SAT scores of economics majors

Table A3 of Estimating the Return to College Selectivity Over the Career Using Administrative Earning Data seems to indicate that a 100 point increase in SAT score (on a scale of 1600) was, for the class of 1976, associated with a ~2% increase in income, and was, for the class of 1989, associated with a ~4% increase in income.

It's been suggested that SAT math is what correlates with earnings rather than SAT verbal. If true, this would mean that a 50 point increase in math corresponds to the aforementioned percentages.

Given that the percentage increased between the class of 1976 and the class of 1989, one would expect it to have increased further since then. If one extrapolates linearly, one gets a ~6% difference in income for the class of 2002.

I found SAT score data from two sources, which I've given below. The data shows that economics majors score between 50 and 100 points higher than other majors, with more of the advantage in math than in verbal. 


Heterogeneity in human capital investments: High school curriculum, college major, and careers (Table 1) gives information on SAT score by major for students from 1993-2003. Some of the data therein is in the following table. The columns are major, math SAT, verbal SAT, combined SAT, and the difference between total SAT and economics total SAT.

Economics 597 575 1172 0
PoliSci 542 571 1113 -59
History 558 595 1153 -19
Psychology 530 540 1070 -102

The 2009 paper Determining the Future Income of College Students gives figures as well, taken from a cohort of students who were between 13 and 17 in 1997. The columns are major, math SAT, verbal SAT, combined SAT, and the difference between total SAT and economics total SAT.


Economics  629 588 1217 0
PoliSci 573 580 1153 -64
History 552 616 1168 -49
English 562 609 1171 -46
Psychology 554 579 1133 -84
Sociology 486 508 994 -223

Based on this data, there's a lot of uncertainty as to how much of the wage gap comes from ability as measured by standardized tests. But the wage gap can't be fully explained by differences in pre-existing ability as measured by standardized test scores. Consider the case of economics vs. political science, where economics majors make 20% more. If one assumes that a 50 point increase in math SAT increases income by 6%, and that economics majors have math SAT 75 points higher than political science majors, then one finds that pre-existing ability as measured by standardized tests would predict a 9% wage gap, which is substantially less than 20%.

Comparison with graduates of elite colleges

Another perspective that shows that ability as measured by standardized tests can't be driving most of the wage gap comes from comparing the earnings of economics majors with the earnings of graduates of elite colleges.

SAT scores of graduates of elite colleges are very high, with 75% of students scoring 700+ on a given section (at the 95th percentile or higher). The SAT scores of economics majors are lower: the highest subsection score listed above is 629 math, which is at the 85th percentile on the current SAT. This suggests that the 75th percentile of economics majors in SAT math is no more than the 93rd percentile for the general population (half way between 85th and 100th).

Payscale reports that graduates of elite colleges make on the order of $50k-$60k and that economics majors make ~$48k starting salaries. According to the National Association of Colleges and Employers Salary Survey, the 25th/50th/75th percentiles of earnings of economics majors are $43k/$53k/$66k. There's some incongruity between the results of the different surveys, but it seems likely that the 75th percentile economics majors in starting salaries make more than the median graduate of an elite university. This is further supported by Payscale's 2008 report, which says that the 75th percentile of midcareer earnings for economics majors is ~$140k, compared with ~$120k/year for the median graduate of an elite college. 

So the 75th percentile economics majors have higher starting salary than median graduates elite colleges, despite having lower SAT scores. Furthermore, the median graduate of an elite college isn't a randomly selected person with his or her SAT scores: he or she has other traits conducive to success (as measured by the college admissions process): despite these advantages, he or she makes less money than economics majors with lower SAT scores.

Note: The juxtaposition of the midcareer data from Payscale's 2008 report with present day SAT averages may give an impression that the gap is larger than it is, because at the time when people who are currently in the middle of their career were in college, SAT averages at elite colleges were lower than they are now.

#4 Pre-existing desire to make money

Economics majors probably have more desire to make money than other liberal arts majors do, but the size of the effect is unclear.

Higher rates of selfishness?

As discussed in the section "#2 Acquisition of a desire to make money," there's psychology research purporting to show that economics students and professors placing material gain above helping others, relative to other people. In some cases this research does not disentangle correlation and causation, leaving open the possibility that those who choose to study economics give more weight to having money. As above, there's reason to be skeptical of this research.

Evidence about the influence of financial motivations on major selection

A number of research papers address how much weight college students give to future earnings when selecting a major. These papers vary in their results or in how they frame their results, or both.

For example, How do young people choose college majors? by Montmarquette, Cannings, and Mahseredjian (2002) says

The results of the paper show that the expected earnings variable is essential in the choice of a college major.

whereas Ability Sorting and the Returns to College Major by Arcidiacono (2003) says

Even after controlling for selection, large earnings premiums exist for certain majors. Differences in monetary returns explain little of the ability sorting across majors; virtually all ability sorting is because of preferences for particular majors in college and the workplace, with the former being larger than the latter.

and Choosing the Field of Study in Post-Secondary Education: Do Expected Earnings Matter? by Beffy, Fougère and Maurel (2009) says

Simulating for each given major a 10 percent increase in the expected earnings suggests that expected earnings have a statistically significant but quantitatively small impact on the allocation of students across majors.

 


We're interested in how much economics majors respond to financial incentives relative to other majors

The most relevant paper here seems to be Modeling college major choices using elicited measures of expectations and counterfactuals by Arcidiacono, Hotz, and Kang (2010). The sample size is small and possibly unrepresentative in relevant respects. The authors studied 173 undergraduates at Duke University, ~20% of whom were economics majors, and asked them questions involving them hypothetically majoring in other subjects. They grouped students into the categories of majors "science," "humanities," "engineering," "social sciences," "economics," and "public policy." They find that

Taken together, the first two bullet points give the impression that ~15% of economics majors are in it for the money whereas 85% are not. If true, this would establish an upper bound on the desire of economics majors to make money relative to other majors.

The third and fourth bullet points raise the possibility that some students in other majors are as responsive to financial incentives as the economics majors who are responsive to financial incentives, so that the actual gap in responsiveness to financial incentives could be smaller than the 15% figure suggests. 

As psychologist Robert Cialdini discusses in Influence: The Psychology of Persuasion, once people have made a decision, they tend to come up with multiple reasons why it was the right decision, unrelated to their original reason. It could be that of the 85% who said that they would major in economics anyway, for some, if they thought that their expected earnings were the same across majors before having decided on economics then they would have majored in something else. So the gap in responsiveness to financial incentives could be larger than the 15% figure suggests.


A relevant study with a larger sample size is Choosing the Field of Study in Post-Secondary Education: Do Expected Earnings Matter? by Beffy, Fougère and Maurel. (I have not vetted their analysis, and don't know whether or not it's reliable.) They group majors into "Sciences," "Humanities and Social Sciences" and "Law, Economics and Management." They find that a 10% decrease in earnings (for a given subject group relative to others) reduces the percent of students who major in the subject group by 0.234 absolute percentage points for the sciences, 0.347 for the humanities and social sciences, and 0.432 for law, economics and management, suggesting that economics majors are more responsive to financial incentives. About 33% of students majored in each subject area, so the changes relative to number of majors in a given subject are on the order of 1%.

One could interpret this as evidence that the students aren't very responsive to financial incentives altogether, with law, economics and management students only marginally more than humanities and social science students. But it's possible that one would see much a much greater diverge between the groups if one looked at the impact of a 20% or higher decrease in earnings rather than a 10% decrease in earnings. Perhaps what's going on is that even if law, economics and management students made 10% less, they'd still be making more than they would in other majors, and they'd switch precisely at the point where they started making less money than they would in other majors.

Since law, economics and management are grouped together, the gap could be coming from law and management rather than economics.

#5 Signaling

Majoring in economics probably signals desirable traits to employers, but the degree to which this is true, and the impact on expected earnings is unclear. (On the latter point, note that college major plausibly plays much less of a signaling role decisions about raises and promotions than it does in hiring decisions.)

It's worth noting that majoring in economics doesn't have to be an accurate signal of a desirable trait in order for it to have signaling benefits: all that's necessary is that employers believe that it's a signal of the trait.

The fact that economics majors make more is a signal that they're better employees

Unless one attributes the wage gap entirely to signaling (which would correspond to a belief that employers are generally mistaken in paying economics majors more), one can know that economics majors tend to be better workers, even if one doesn't know why. Thus, employers will take the fact that economics majors make more money as a signal of quality. So the wage gap itself gives rise to signaling benefits. 

Employer surveys

According to a survey of the The Chronicle of Higher Education:
  • Economics is one of the most desired majors in business (pg. 67)
  • 19% of employers state that they look for specific majors, 44% value some over others, 34% say that they balance it with other factors, and 3% say that it's not important at all. (pg. 64). 

The preference for certain majors will be presumably be lower if one restricts to non-technical jobs. It should be noted that employers listed internships and employment during college as more significant than college major, with volunteer experience and extracurricular activities are not far behind. (pg. 24)

2013 Gallup poll of business leaders asked about the weights that they assign to different factors when making hiring decisions. What they indicated is summarized below. (The columns starting with the second are the percent who ranked the factor as "very important", "somewhat important" "not very important" and "not at all important") 

Knowledge of field 84 14 2 0
Applied skills in field 79 16 2 2
College Major 28 42 22 8
College attended 9 37 40 14

Presumably it's easier to assess knowledge of field and applied skills in field for experienced job candidates than for inexperienced job candidates, so that the role of college major in hiring decisions would decrease over time, as one would expect. 

Quotations from economics departments

As with human capital acquisition, college economics department webpages generally say that employers consider economics majors to be desirable workers, and these sources are biased. They dominate Google hits when one searches for information on whether majoring in economics signals quality.

Quotations from economists

As above, economist Bryan Caplan thinks that economics teaches few employable skills, but also writes

1. "Mickey Mouse majors" = Majors with low financial rewards. Judged against standard #1, economics is clearly not a Mickey Mouse major. Adjusting for preexisting ability, economics is one of the most lucrative majors - almost on par with electrical engineering.
suggesting that he believes that being an economics major has significant signaling benefits.

In “Economics: The “Just Right” Liberal-Arts Major?” Economist David Colander wrote 

We asked economics students to identify majors as hard, moderate, or easy, and we found that 33 percent viewed economics as hard, 3 percent said sociology was hard, 7 percent saw psychology as hard, and 13 percent thought political science was hard. Since other social sciences were the primary alternative majors that most of the economics students considered, that data is compelling evidence that the respondents perceived those other majors as too easy. Students likely reasoned that taking a “too easy” major would signal to potential employers that the student had chosen an easy path through college, thereby hurting their chances of being hired.

Quotations from former college students

From Graduates Weigh In: What Is the Value of a Humanities Degree?

Anton Troianovski:

This attitude tracked with Harvard’s general message to freshmen, one that I think many of us accepted at face value: if you find the field of study that excites you most, the job search will take care of itself. Classmates would sometimes say they’d heard that Goldman Sachs and McKinsey may well hire a star of something like the folklore and mythology program over yet another cookie-cutter economics grad. This was in the booming mid-2000s. I wonder whether the harder economic times since then have made that message—emphasizing learning for learning’s sake—less convincing.

Jessica E. Lessin:

Most of the people I knew in college studied humanities. But they tried to make themselves more marketable to employers by squeezing in a class or two on economics. I think they were right to follow their interests. Recruiters at the time seemed more focused on how well you did in class, not what you studied. But if you wanted to work on Wall Street or at a consulting firm, an econ class didn’t hurt.

From Economics, Once a Perplexing Subject, Is Enjoying a Bull Run at Universities

For many students, however, economics is just the quickest way to land a good job. David Reinstein, 22 years old, started at George Washington University in a dual program of economics and political science. By the time he graduated in June, he had dropped the politics for economics alone. "People are impressed because it's difficult," Mr. Reinstein said. "Economics is respected." His resume also impressed CNA Corp., an Arlington, Va., government contractor where Mr. Reinstein landed a job as a research specialist.

Wall Street Oasis forum threads 

These mostly concern getting jobs in finance:

Liberal arts major= DEATH SENTENCE or NOT?,

Do employers see a difference between an economics or a psychology major?

Duke Econ Major?

rejected twice !! Too liberal for the bank?!

The starting salary vs. midcareer salary test

The same considerations in the subsection "The starting salary vs. midcareer salary test" of the section "#1 Human capital acquisition" of this post apply to assessing the role of signaling.

Other explanatory hypotheses

  • As diplostreetmix wrote at The Bill Fold, majoring in economics may not increase desire to make money relative to other desires, but rather, could help people learn to co-optimize to meet their goals better in general, and this could help them get higher paying jobs, even if the subject matter knowledge isn't useful to them on the job.
  • There could be a correlation between finding economics interesting and finding certain jobs that happen to be high paying interesting, even in absence of a direct connection between the subject matter of economics and what's done on the job, and independent of financial considerations. This would induce a correlation between majoring in economics and earning money.
Cross-posted to the Cognito Mentoring blog 

8 comments

Comments sorted by top scores.

comment by Annaqu2018 · 2019-06-06T18:48:09.833Z · score: 1 (1 votes) · LW · GW

I think that economics majors end up making more money pretty much because economics majors end up getting employed in areas that manipulate the flow of money. In short, econ majors are more likely than other majors to be involved in the exchange of money. And having that much access to money changes the way you think. It makes you think more strategically and more rationally. It inclines you to value things that can be easily quantified (like cost, income, time) more than things that are not so easily quantified (like happiness, quality of life, and moral motivations). Because you end up thinking more strategically and rationally and really focusing on things that can be easily quantified and therefore more easily assigned a dollar sign, you end up making decisions that get you a higher income.

Additionally, this money aspect is significant for another reason. I strongly believe - (I don't seek to find hard data to support my claim because I believe that theory, thinking, and ideas that associate with trends matter more than the data that I have trouble analyzing and understanding) I strongly believe that if you were to diagram out all occupations based on the occupations' amount of involvement with manipulating and determining monetary value, you would find that these same occupations pay the most. I will bring in a couple of examples. First example, and most obvious: finance, in which you trade stocks and determine the value of stocks, whatever they are. To me, they are just like currency/money, another form of currency/money. Lawyering: in which you both have to argue well but also quantify damages and punitive awards in a court of law. Plus, as a lawyer, you have to run a business and manage the flow and exchange of money between you and your clients. Marketing/accounting/business: in which you have to A) handle and allocate money to advertising campaigns/ B) look for patterns and trends in money allocation and figure out ways to make it more efficient/productive/ C) manage the flow and exchange of money between your organization and outside groups. Now also look at scientific research, IT/Computers, and engineering: from what I recall in my macroecon class, which I did okay in, except for the parts that really involved understanding the exchange of monetary value, technology really boosts economic growth. Macroecon theory says that technology increases the production possibilities frontier, thereby boosting monetary value overall. And scientific research, IT/Computers, and engineering are fields that produce technological innovations, so they are all fields that indirectly create a net increase in monetary value over time.

What about other fields with high incomes, such as plumbing, those successful actors/actresses, well-paid artists, and doctors and surgeons employed in hospitals who don't really need to manage money all that money all that much? I believe that these careers pay a lot precisely because they require a specific acquisition of skills that are very difficult to acquire in the first place. For plumbing, you have to be deft with your hands and very conscientious and willing to work in grimy conditions. To be a successful actor/actress, you must have very very high social intelligence, extremely high empathy, good connections, beauty/good looks, kinesthelogical ability/ability to move your body in an artful and attractive manner... To be a well-paid artist, you must have original ideas that reflect a certain prevailing sentiment specific to your era, manual dexterity, sometimes physical strength for sculpting and abstract art, and a knack for self-promotion. To be a good doctor/surgeon, you need to acquire the whole gamut of scientific knowledge, have empathy and social skills, be adept with physically handling medical equipment, and have strong intuition. In short, these other fields that pay high require lots of physical/kinesthelogical/manual dexterity, may involve high risk, and may require creativity.

But what about everyone else, like waiters/waitresses, teachers, cashiers, low-paid artists, struggling actors, farmers, some skilled industrial laborers, parole officers, beauticians, therapists, day-care workers, miners, factory workers, and liberal arts majors? I believe that these people don't get paid as much as those working in econ/business and those working in other fields because: A) Wall Street investors tend not to invest in these individuals' enterprises, meaning that there is little potential for these individuals' enterprises to really grow a lot because it would difficult to obtain the financial backing necessary for growth. B) These people are much more removed from the exchange, flow, and manipulation of money on the corporate, strategic organizational level. C) The value of these workers' contributions to society are more-so moral in nature, aesthetic in nature, protective in nature, or allowing the firm's strategic/corporate-level workers to continue making their strategic/corporate-level decisions in nature. However, morally-directed, aesthetically-oriented, protectively-focused, and corporate-structure-maintaining organizations benefit society in ways that are harder to quantify or monetize. Therefore, less money is made.

In short, these are my ideas/theories. It would be interesting if these/theories could somehow be tested. This is my take on the issue, really. I just believe it has to do with the proximity to the main task of manipulating money, determining monetary value, and exchanging money, whether Wall Street really wants to invest in your firm, and whether your occupation is by nature easier to quantify through a monetary value.

As far as I'm concerned, I am far more interested in theory/idea than I am in analyzing data and determining value. In fact, all of your correlational analysis and data analysis were rather hard for me to follow. I got the general gist of your ideas though. Maybe if the data was inconclusive with those ideas, could the data be more conclusive with these ideas?

I would be a prospective history major at Vanderbilt, by the way.

comment by Pattern · 2019-06-06T22:29:10.571Z · score: 3 (2 votes) · LW · GW
And having that much access to money changes the way you think.

I'd say this is seems like it'd be a thing with regards to salary* - if you have more (as opposed to just getting by), then you have more resources that can be directed towards investment.

*With the caveat that if you live somewhere that's really expensive, maintaining the staus quo might eat up all your funds/resources, so you might not have stuff left over for investing. If your job starts paying you $1000 more per year, but your rent starts costing you $1000 more per year, you gain zero benefit. (If you have to work harder/longer now then the overall gain is negative.)

It makes you think more strategically and more rationally.

It's not immediately clear whether there actually is a change in behavior, as opposed to good selection. (Though it does make sense that gaining more experience (with money) leads to greater skill.) It also might be good to unpack what you mean by "rationally":

It inclines you to value things that can be easily quantified (like cost, income, time) more than things that are not so easily quantified (like happiness, quality of life, and moral motivations).

This doesn't sound very "rational", it sounds like a Goodheart mistake.

Also, one would think that having a lot would enable one to focus on these more, as opposed to less. (Again, is this a change in behavior, or the result of selection - a) people who make a lot of money might be trading other things for money. b) people who make a lot of money might overvalue it?)

But what about everyone else,

The (case for the) Baumol effect argues differently - you have to pay people more to work in other industries, even if they haven't experienced growth, to pay them (closer to) the (new) opportunity cost. This is (supposedly) why prices go up (and why everything is so expensive).

However, morally-directed, aesthetically-oriented, protectively-focused, and corporate-structure-maintaining organizations benefit society in ways that are harder to quantify or monetize. Therefore, less money is made.

This is why there are other business models. (Libraries and parks, NGOs, non-profits - these (supposedly) aren't run the same way as corporations per say.)

It would be interesting if these/theories could somehow be tested.

A number of my comments (above) were about possible things to control for.

comment by ChristianKl · 2019-06-06T20:23:01.538Z · score: 3 (2 votes) · LW · GW

How is being a cashier not exchanging money?

comment by [deleted] · 2015-05-05T20:51:44.661Z · score: 1 (1 votes) · LW · GW

I think maybe, most people who are intrigued by economics are the type of people who naturally think relatively strategically? Strategic thinking definitely has some correlation with SAT type intelligence, but is still a slightly different skill.

So then I think that either:

(1) Strategic thinking is a valuable skill that is highly valued, leading to higher salaries, and/or

(2) Strategic thinking helps people who want higher salaries get them (I'm guessing the pre-existing desire for a high salary isn't significantly stronger among economics majors than other majors.)

The idea of naturally strategic thinkers being drawn to economics is based on my own experience. Has anyone else made similar/different observations?

comment by Alsadius · 2014-04-22T03:37:31.270Z · score: 0 (0 votes) · LW · GW

Econ major currently working as a financial advisor here. My impression is that the major itself was nearly useless, but it points you towards an industry(finance) that has real job prospects and remarkably high compensation for those who are good at it. The coursework isn't much more relevant than poli sci to my job, but poli sci majors go to law school and then flip burgers to pay off their crippling debts, or if they're there because they like politics, they go work 80 hour weeks on the Hill for $30k.

Not many econ majors do either of those things - we go work for banks. Not because of the money per se(though obviously, I'm pro-getting-paid), but because what else does one do with an econ degree?

comment by niceguyanon · 2014-04-21T17:17:25.383Z · score: 0 (0 votes) · LW · GW

I wonder what the differences are between Econ and Finance majors in terms of starting and mid career salary.

A big factor in choosing either one is whether you can get in to the right program with in the University to begin with. I remember lots of kids being rejected from the management dept, which excluded them from declaring a majoring in Accounting and Finance, and having to fall back on the liberal arts dept, and major in econ, because it was the next best thing. I'd guess this was the case for 90% of Econ majors at my school. I have no idea if this was true in other Universities.

comment by Lumifer · 2014-04-21T17:51:53.305Z · score: 0 (0 votes) · LW · GW

I wonder what the differences are between Econ and Finance majors in terms of starting and mid career salary.

Are you sure you're interested in that question or in an alternative one: For a given person, how does his choice of majors between econ and finance impact his earning potential?

These are noticeably different questions. Also note that by mid-career no one at all cares about the undergrad major.

comment by niceguyanon · 2014-04-21T18:06:16.778Z · score: 0 (0 votes) · LW · GW

Also note that by mid-career no one at all cares about the undergrad major.

Yea that is a good point.