The Competition for Economics Ph.D.'s

June 06, 2002

In each of the past three years, Stanford University's business school has gone head to head with its economics department and lost.

What have they been fighting over? Faculty members with Ph.D.'s in economics.

David M. Kreps, senior associate dean for academic affairs in the university's business school, says it has lost junior and senior scholars to Stanford's economics department, even though his school offers them salaries that are $20,000 higher. He declined to specify the base salary his school offers.

Money isn't the only factor in a Ph.D.'s decision to accept an offer, he says, but adds: "If we're not offering premium wages, rookies won't talk to us at all. It's viewed as an appropriate 'compensating differential.' That's economist talk for what you've got to pay to get the people to come here."

As enrollments in undergraduate economics and M.B.A. programs continue to grow, the competition for economists is more intense than ever between business schools and traditional departments, say those hiring in both arenas. Business schools pay higher salaries to economics Ph.D.'s, but offer them far less freedom to develop courses outside the M.B.A. curriculum. Economics departments in colleges of arts and sciences pay their professors less, but give them more of an opportunity to teach courses that interest them and that are directly related to their fields of study.

How Ph.D.'s in economics decide where to work often has more to do with which environment they prefer than with compensation, according to chairs of economics departments, deans of business schools, and job candidates themselves.

"Teaching M.B.A.'s is hard work," says Mr. Kreps, who has seen his share of new professors unwilling to take on these students. "I believe -- without trying to cast aspersions on my friends in the arts and sciences -- that people in business schools spend more time on their teaching than people in arts-and-sciences departments," he says. "We face a tougher audience, more critical, more demanding. The students are older. I suspect that they are paying for their education themselves."

He finds teaching M.B.A.'s ultimately rewarding because professors in business schools are closer to the "end-users of economics," people who will become businessmen and women. "Some people are convinced by this," he says. "Many people are not," which is why even though his school is offering attractive salaries, in the last five years it has still lost more job candidates than it has won.

Last year the business school made seven offers in economics, three for assistant professorships and four for full professorships. Only one person accepted. "Stanford is known as a high-cost area," Mr. Kreps says. "Maybe that was part of it. But at least one junior person and one senior person turned us down to take appointments in Stanford's economics department."

Despite the competition, Mr. Kreps says his school, which employs 12 economics Ph.D.'s in its economics group and five others scattered throughout the school's departments, doesn't get into bidding wars for new economists. "Rookie salaries tend to be to scale," he says, which means the school will pay what the market in business schools is offering but not much beyond that. "We try not to differentiate between different groups." There are, however, two exceptions. The school does offer salary premiums for professors in finance and accounting "because that's where the national market is," Mr. Kreps says, although he declines to reveal the amount of the salary premium or the starting salary in those two fields. Accounting professors usually have Ph.D.'s in accounting, while finance professors have Ph.D.'s in a variety of fields, some in economics, some in finance, and some in operations research.

Oliver Hart, chairman of the economics department at Harvard University, says some Ph.D.'s in the field would never consider a business-school berth, but his department does end up competing for those who would. "This year, we made four offers," he says. "One of the people ended up going to a business school. One we're still waiting to hear from -- he has offers from economics departments and business schools. The other two are not the kind of people business schools would be interested in."

Mr. Hart says the two environments are very different, so that going to one or the other isn't just a matter of money. "M.B.A.'s are very bright but are more interested in the bottom line," he says, while students in economics departments have more scholarly interests. "An M.B.A. is someone who has worked for a few years and wants to get more training -- not that they can't be intellectual, but they're here for two years and looking for skills that can apply rather directly to their careers."

The competition for economists is not just for junior hires but for senior scholars too. "At the senior level, it is always possible that someone here will get a very rich offer from a business school," says Mr. Hart, although that hasn't happened recently. He declines to reveal the salaries his department offers at Harvard.

In his six years as chairman of the economics department at Indiana University at Bloomington, Robert A. Becker has lost only one person, an associate professor, outright to a business school. "Salary was an issue, but it wasn't the only thing," he says. He recalls that nearly six years ago, the professor, who was making in the mid-$70s, left the department for a business school at a "very fine" private university where he would earn more than $90,000. "When we lost the professor to the business school, we made the decision not to make a counteroffer," Mr. Becker says. "It was such a big difference. We didn't see we could justify that increase. He was a good guy, but there was just no way we could compete with that."

David E. Mills, chairman of the economics department at the University of Virginia, says he faces the threat of losing one or two of his colleagues in his department every year. At departments like his, Mr. Mills says that the average salary of an assistant professor of economics is $70,000 and about $110,000 for a full professor. The average salary of an assistant humanities professor at UVa is $48,858 and $94,063 for a full professor.

"The academic market for economists is pretty active right now," Mr. Mills says. "A lot of people, especially people with very good reputations, are almost continually in the market." As a result, department heads, he says, are constantly thinking about how to retain their colleagues, "how to make the work assignment attractive to them so that if someone comes looking for them they may be reluctant to leave."

For some new Ph.D.'s, a work assignment in a traditional economics department is what attracted them to the profession in the first place. Robert C. Tatum accepted an offer as an assistant professor in the economics department at Denison University, in Ohio, next fall, even though a business school at a Southern research university offered him an assistant professorship that would have paid him $18,000 more. "It's actually double the salary I'd be getting at Denison if you adjusted for cost of living," says Mr. Tatum, who will receive his Ph.D. in economics from the Bloomington campus in August.

He didn't take the business-school offer because he would have been teaching M.B.A.'s at night and because he preferred the more traditional schedule of teaching in a liberal-arts institution. "One of the things that weighed into it was that the role of economics in business school seems to be more of a service department," Mr. Tatum says. "In arts and sciences, you get to do a range of classes," such as upper-level undergraduate classes, international trade, and money and banking, and not just introductory courses.

Others, however, find that their research interests are able to fit neatly into a business school. Katja Steim, an assistant professor of economics at Stanford's business school, passed on other offers from both economics departments and other business schools because she found she could pursue her research interest -- empirical industrial organization -- at one of the more "research intensive" business schools, like Stanford.

So far, Ms. Steim, who earned her Ph.D. from Yale University last year, has enjoyed teaching M.B.A.'s, despite some initial skepticism. "If you come out of an economics department, it's hard to judge if you'll be a good M.B.A. teacher and if you'll like it," she says. "On the market, everyone tells you it's very different and a lot of work," something she has learned herself. "I've found my students to be smart and interested, definitely more demanding than undergraduates in terms of having to justify what you're teaching in class and how relevant that is to their experience."

The higher business salary, she says, did slightly influence her decision to teach at a business school. While economics departments offered her $80,000, business schools offered her $105,000. The money "is a nice side bonus," she says. But "it wasn't my main motivation."

And it shouldn't be, says Robert P. Magee, associate dean for academic affairs in the Northwestern University's business school. He has always advised "newly minted Ph.D.'s to find the place where they're going to have the best springboard for their careers and for learning how to do things that make them excited to get up in the morning," he says. "The money isn't going to make you happy."


In arts-and-sciences colleges, some deans resent the high salaries they have to pay to economics professors.