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ACCOUNTING CAREERS AND INCOME DIFFERENTIALS
Abstract: The accounting profession may differ in
its relative attractiveness compared to other careers to students,
and this relative attractiveness may give rise to compensating income
differentials. Such differentials represent equilibrium market outcomes
and can persist until supply or demand conditions in the various
job markets change. Examining the economics of labor supply may
provide insight into the career choices students make.
Introduction
Incomes differ greatly among individuals and among
careers. There are three economic reasons why these income differentials
arise. First, people have different levels of skills. Differences
in skills may result some people being more productive than others.
Those people with greater skills will earn higher income, in a competitive
labor market. Second, "monopoly rents" may be essentially
earned by people in certain careers. For example, the Certified
Public Accounting Examination’s 150-hour requirement successfully
further limits access to the public accounting profession. Incomes
in the accounting profession may result in higher career incomes
for the accounting profession. Third, incomes may differ across
careers because some careers are more pleasant than others. More
enjoyable careers will attract a large supply of applicants, and
this may result in the incomes to be lower than in less desirable
careers.
In this paper, attention will be focused on the relative
pleasantness of the accounting profession as cause for income differentials.
It is assumed that all people are equally skilled and that there
are not monopolistic elements in the income-setting process. Income
differentials can arise, and this income differential is examined.
Differing Characteristics of Careers
Differing characteristics of careers may lead to differential
incomes. The differential income reflects differences between the
advantages and disadvantages of a particular career and its related
income. Even without restrictions to career or skills, income differences
would continue because of the relative attractiveness of certain
careers. The labor market operates to equate the total benefits
of a career, not simply the monetary compensation of a certain career.
Economically, these career income differences that relate to the
amenities of various careers are referred to as compensating differentials:
higher incomes offset the unpleasant working environment.
The demand function for both careers is represented by the function
DD. Because it is assumed that these careers differ in attractiveness,
the supply of labor to them will also differ. The function SA represents
the supply to the accounting career (non-pleasant career), and IA
gives the equilibrium income. At this income, employers in the accounting
industry (non-pleasant industry) will demand LA labor-hours of input,
and this is what people are willing to supply. On the other hand,
the function SL represents the supply to the literature career (pleasant
career), and IL gives the equilibrium income. At this income, employers
in the literature (pleasant) industry will demand LL labor-hours
of input, and this is what people are willing to supply. The supply
function for the literature (pleasant) career lies to the right
of the supply curve for the accounting (non-pleasant) career because
of the differences in the careers. At any given income, people are
willing to supply more labor to the literature (pleasant) career.
By the interaction of the supply and demand functions, an equilibrium
income of IL will be established for the pleasant career (literature).
Of course, this income will be below IA, and the difference between
IA and IL is an income differential that compensates for the relative
unpleasantness of the accounting career. The equilibrium in the
appendix is stable: There is no incentive for a person to transfer
from one career to the other. The net advantage of the two careers
has been equalized.
Conclusion
The concept of compensating differentials has been
explored and applied to the accounting profession. Career choice
is an important decision for students. People must decide not only
how many hours to work but also which career in which to work those
hours. Many careers differ in their relative attractiveness, and
this may give rise to compensation income differentials. Such differentials
represent equilibrium market outcomes and can persist until supply
or demand conditions in various career markets change. By having
a better understanding of compensating differentials, people have
a better opportunity of making utility maximizing decisions regarding
their careers
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