11/3(금)What Determines How Much Money You Earn?

[Ross(황세영)]

11/3(금)What Determines How Much Money You Earn?

By Chang Se-moon Professor of University of South Alabama Company officials interview job seekers at a tour industry job fair in Seoul. It is not always true that diplomas guarantee high wages but high level of education will surely heighten chances of landing well-paying jobs for young people.   /Korea Times File Once I saw a TV advertisement in which a guy came to a store to buy a billfold. The storeowner, a Chinese lady, was smiling and asked him whether the billfold was for a graduation gift. He responded by saying that he only had a high school education. The Chinese lady then turned to her husband and spoke in Chinese so that no one, other than Chinese, could understand. Her husband brought out a billfold that was less than half the size of regular billfolds. Needless to say, the small billfold was useless. The guy said to the Chinese lady: "Isn't this billfold too small?" The Chinese lady responded by saying that high school graduates earn only about half as much as college graduates. It was funny, and sent a potent message. Obviously, education is the most important determinant of how much you make. However when Richard Fairbank of Capital One Financial ($249.3 million), Jerald Fishman of Analog Devices ($144.7 million), and James Kilts of Gillette ($185 million) earned more than $100 million last year, their large earnings cannot be explained by education alone. There must be other factors, perhaps many other factors. In economics, we explain how much workers earn this way. Let us suppose that we are selling the very popular Assi noodles. Suppose also that we plan to add a sales person to increase our sales. Should we hire the person? If we should, how much should we pay? In principle, we hire a person if the money the person brings to our company is greater than the money we pay to the person. It sounds easy enough. We need to go a couple of more steps to complete our explanation, however, because we need to estimate what the new person is expected to bring to our company. The number of packages of Assi noodles that the new person is expected to sell is called the marginal physical product. These Assi packages are products. They are also physical products. We thus call them physical products. When we refer to marginal in economics we are dealing with the last added unit, or last additional person. The number of packaged Assi noodles the new person is expected to sell, therefore, is called the marginal physical product. We calculate the money that the new person brings to our company by multiplying the marginal physical product (MPP) by the price of the product. If the new person is expected to sell 100 packages of Assi noodles (MPP = 100) per day, and if the price per package is $3.00, the money that the new person brings to our company is $300, which is obtained by multiplying 100 by $3. The $300 thus obtained is the gross marginal revenue product (MRP). Assuming that it costs our company $100 to buy the 100 packages from the manufacturer Assi, the net marginal revenue product of the new person is $200. In other words, the new person will add $200 of profit per day to our company. Should we hire the person? It depends on how much we should pay to hire the person. If it costs less than $200 per day to hire the person, we should hire him or her since the difference between MRP and the wage is the net additional profit to our company. If it costs more than $200 per day to hire the person, we should not hire him or her since the difference between MRP and the higher wage represents net loss to our company. Since MRP tends to be greater than the wage in a growing company, economists say that we need to increase employment until MRP equals wage. When we talk about wages or salaries, do not forget that there are also fringe benefits as part of the compensation package. Examples of fringe benefits are health insurance coverage, retirement pensions, paid vacation, employee discount on company products, and other non-wage benefits that employees receive from their employers. When you add all fringe benefits, the amount of fringe benefits can easily be 25 to 40 percent of direct wages for most employees. Although the underlying economic theory is the same, we can take a look at the determination of how much you make on the basis of a supply and demand model. Like everything else in a market economy, the amount of money we earn depends on supply of, and demand for, workers who can do the same type of work. If demand is greater than supply, our wages will increase. If supply is greater than demand, our wages will fall. I know one excellent student at my university who wants to be a writer, but is majoring in accounting. His logic is that he wants to make some money by doing an accounting work before he can concentrate on writing. I think he is realistic. Once you become a popular writer, you can make a lot of money. There are two problems, however. One is that there is no guarantee that you will become a popular writer, and the other is that even if you eventually become a popular writer, you may have to go through many days of hunger and disappointment. The root of his problem, again, is supply and demand. Supply of writers is greater than demand for writers, pushing earnings of writers down. In comparison, the supply of accountants is relatively lower than the demand for accountants, pushing their wages up. In general, wages are higher in finance, accounting, and medicine, while wages are lower in the various fields of art and music, and many social science fields. Even in the same occupation, the supply of and demand for workers fluctuate. About 10 years ago, there was a surplus of nurses especially in the United States, but now there is a severe shortage. There is even discussion of inviting 10,000 Korean nurses to the United States to relieve the shortage. When you go to college or select a major at college, you may have to make a compromise between what you really want to do in your life and how much you can earn after graduation. Ultimately, it all depends on what makes you happy. If your objective is to make as much money as you can, you can study hard and try to go to the medical school or study an MBA with concentration in corporate finance or accounting. If you put more emphasis on happiness than on money and power, you can select the major that you like and try to be good at it. I said earlier that those who major in finance in general make more money than those who major in other business and social science fields. But then, most people who died from the September 11, 2001 terrorist attacks in New York were working in the finance fields. I said earlier that the lifetime earnings are directly proportional to the level of education. But the world's richest person, Bill Gates of Microsoft, did not even complete his college education. Someone once said that life is queer with its twists and turns. You can never tell. All you can do is to make the best decision at the moment and do your best.