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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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