Friday, April 13, 2007

Pay Raise

Today I received a letter from my Dean. The annual pay raise letter. This year's pay raise was 1.75% which is slightly better than last year but still less than the rate of inflation. The maximum possible raise was 2.5% though the Provost can in special cases award a little extra. This is $66.50 extra per month in take home pay, which is almost a 2% increase. Maybe you can see why I am so determined to become a consistently profitable trader. These below inflation pay increases are just demoralizing. A successful trader's income will rise at the rate at which he or she saves. So if you could save 20% of your income you'd get a 20% income increase in the next year, all things being equal, or as economists like to say, ceteris paribus. Up till about age 40 my rate of wage income increase was around 7.5% per annum.

Income does tend to rise fast until people reach about 40 years of age at which time the rate of increase slows until maximum income is typically reached in the mid-50s. After that it tends to decline. This is the US profile from Finn Kydland's Nobel Prize lecture:



Snork Maiden said: "Is that why people have mid-life crises?"

14 comments:

D said...

I'm surprised. With the costs of education rising faster than pretty much everything else, I assumed, it would carry through.

Very interesting...just whom gets these dollars?

mOOm said...

I did get one above inflation increase - a 5% bump when I received tenure. I'm coming in with pretty good evaluations so some professors get less extra. OTOH the President of our university has seen substantial raises since arriving on campus. You can get a bigger once off raise by being promoted to full professor. Or maybe after that heading into administration. But if you get stuck at Associate Professor your real income is likely to decline over time until maybe you quit...

My university is raising tuition by 7% for next year.

Sticker price tuition is rising very fast at but the average amount paid (after financial aid) is rising slower. And the sticker price payers have to fund a large part of that financial aid. Income equality is rising and universities try to charge those who can afford it and don't have many other options at other good schools a lot.

On top of that productivity isn't increasing much in universities and so prices are likely to rise faster than the average in the economy (economists call this Baumol's Disease). And student services keep being upgraded (dorms, gyms etc.) at the top schools. Other costs like library resources and health insurance and rising at above the rate of inflation.

mOOm said...

PS. Universities pretend that research grants actually bring net income into the university. I am pretty skeptical. It's likely that rising research activity actually is subsidized from tuition.

Yannick said...

mOOm, thanks for the sharing. I’m surprised by the low pay raise. Even if one progress to full professor, he is likely to get large pay raise only twice in his career, when he gets a tenure and promoted to full professor? Here is one example showing how old professors pay gets reduced overtime using the purchasing power over a house.

A top research university does earn money (lots of them) from research grants (NSF and NIH etc). A university (including departments) takes away 40-50% research grants for providing general support. And PIs may need to pay more to rent space in a fancy building. It is indeed very profitable. That’s no wonder top engineering schools care mostly about grants and proposal writing.

mOOm said...

Thanks for the link. Being promoted to Full Prof seems to be a bigger pay bump than getting tenure. I'm a special case as I was an Associate Prof on the tenure track. Not all universities at all times may be as stingy as ours on at least cost of living raises.... The accepted wisdom is that research grants are profitable. But I'm still skeptical. Even with the high overhead components - many agencies don't pay those overheads, don't cover grad assistants tuitions etc.

enoughwealth@yahoo.com said...

Isn't that life-cycle income graph for average income per age cohort? In which case it is largely dependent on how unemployement changes with age - very high for 17-24 yo, and over 50s (as disability kicks in more). This doesn't really have much meaning for individuals - if you stay employed until voluntary retirement your income graph would look a lot different. Same if you suffered a stroke at 45 - your income chart wouldn't look much like Figure 1. And what it would look like is largely in your control, depending on whether or not you had adequate income protection insurance.

mOOm said...

I don't know how the data is computed without digging into the original source. I just took it from Kydland's paper. For example, I don't know if it is the wage received by those employed (i.e. per full time equivalent employer). Anyway, I don't think that would change the distinct slowdown from the late 20s/early 30s to the 40s/early 50s. Of course each individual person will have a different path. I had probably even lower wage income in my 20s (if you don't adjust for when I was actually employed etc.) and a bigger jump from age 30 to 40.

StealthBucks said...

mOOm, I love this stuff. Sorry I've gone radio silent on equities but this graph is a whole mega blogs worth of conversation. I am at a higher rate but in my soon to be mid 40's am seeing the exact same graph. This year I hope to break out and grow income by 7 to 9% but it gets harder to keep up the energy. Also, I blew a good two years on trying to develop a larger staff.

Could you increase income by publishing or lecturing; Perhaps on your passion of trading?

mOOm said...

Hi Stealthbucks - good to hear from you - publishing and teaching (and admin) is what I am getting paid for in my salary. The main way to higher labor income for professors is by winning research grants. If you are very successful in that you could add up to 1/3 of your salary as summer pay. Beyond that you can buy out courses so some granter pays your regular salary. I've had little success in that and see few opportunities to fund the kind of research I do.

Success at grants is also going to help in promotion to full prof. That would be a once off big salary bump which I haven't achieved. The other way is get hired by another school or threat of being hired by another school. Grants help there too. In some fields profs can earn money from consulting. The more money I make from investing/trading the less inclined I am to invest in all those kinds of approaches. I've never been good at the whole networking thing anyway. I'm a nice guy but very shy (yes public speaking is a big part of my job:)).

Anyway the plan is really to follow Snork Maiden wherever she goes and quit academia probably.

StealthBucks said...

Sounds all good. One thing you could look at is being an expert witness on stock fraud or something. Professors can make a bunch for billing research hours on this stuff. I hear there's a group out of Berkeley taking down $400,000 per prof as expert witnesses on a myriad of fields (often ones in which they are questionably qualified) It's the prof thing and the power of the position I guess. Regardless, good luck with Snork Maiden...

mOOm said...

Yes there was an article in the NYT about those guys. They set up a big consultancy firm and most of the work is done by employees and then the professor's (principal of firm) name is used. Those are business school guys. I could pursue consulting in the energy field probably if I wanted to. But I don't really want to do that. Maybe I will if I quit this job. I don't need big bucks, but it is demoralizing to see real pay fall even if your performance report is good. In the long-run I just want financial freedom to produce an average income and live anywhere I want. I'm getting close to achieving it.

mOOm said...

I guess the bottom line from this discussion comes back to Kiyosaki's Cash Flow Quadrant idea. As an employee or self employed person the rate of growth of income is fairly limited and eventually plateaus. Keeping up the growth rate is mainly possible either as a B or I - creating a business or investing. This allows more rapid capital accumulation than just investing in human capital. Of course there is a risk of failure too. But accumulating capital is basically what lead to the tremendous economic growth since the industrial revolution and an individual can exploit this for themselves too.

Adventures In Money Making said...

i'm focussing on building my non-salaried income.
i'm currently trying to grow it to 3k/mo. if that happens i really won't care about the salary growth. (not that i care right now anyway)

mOOm said...

Yes, a pay raise of this size makes little practical difference. At the moment I am averaging $2000 a month from "passive income" and trading, not counting longer term price appreciation and anything going on in a retirement account.