Don’t Sell Yourself Short

It is the season to be job hunting. Amidst trying to decide on new courses, finalizing dissertation proposals and enjoying the Barcelona sunshine, starting this fall we will all have to find something new to keep ourselves busy. While maybe we can stretch the wait out a bit further, studying is not free, and at some point the balance of most of our la Caixa accounts will approach dangerous levels.

Any questionnaire of career plans of GSE students would no doubt throw up a very diverse set of answers. From my own informal surveying answers have included: a range of international organizations, firms, NGOs and PhD placements. Interestingly, answers vary greatly based on students’ age and background. Many of the older students come off disillusioned and primarily in the market for anything that pays six figures. Others still cling to the idea of waking up every morning thinking they have the best job in the world. Better yet some envision glancing up at a pinup of Steve Jobs from their bed, his mantra of “If today were the last day of my life would I want to do what I’m about to do” illuminated by the morning rays, as a nod of mutual understanding is shared with the late IT mogul. 

So where is the problem? At the end of the day it should just be a matter of matching your list of skills to the needs of a particular employer. Once an employer is found a new job should only be a phone call away. Ideally, the economy in which you are looking for a job is at full employment where you could just casually replace a nice man or woman of around 65 who is looking to settle down with their pension taking over their duties and receiving the marginal product of labor of the firm in question.

Unfortunately, the matching process of finding a job is much more complicated than this. Just to scrape the surface of the point of view of economics, the process can be made much more intricate. Drawing on Borjas’ work in labor economics, it should be noted that there obviously exists discrepancy in wages based on productivity differences between workers and how much labor a specific market demands at any given moment. Moreover, it is very hard to answer the question of how to define the level of productivity of individual workers. It is harder still to match acquired human capital from studying and other types of work experience to a new working position. Each worker’s specific skill set is of course a unique combination of background, education, experience, motivation as well as myriad other factors.

But, the rest of this article seeks to look at the question of how important wage is when looking for a job after grad school. If we were all seeking to make as much coin as possible, statistically we should have probably studied medicine. The next best thing would probably be to set our sights on a hedge fund or private equity firm. However, as anyone who has been bored at work will know there is more to working than what you receive at the end of the month. Our generation, unlike two or even one generation ago, is not satisfied working only motivated by money. Even if the pay is good, the work needs to be intellectually stimulating, fun and for many it needs to have some definitive meaning. Motivated by stories of older generations, we worry that if we are solely driven by money we will spend our time completely wasting our lives. To quote the recent viral speech by Alan Watts, if you are motivated only by money, “you will be doing things you don’t like doing in order to go on living, that is going on doing things you don’t like doing, which is stupid.”

Nonetheless, your wage cannot be completely discounted and plays a bigger role than just allowing you to consume and invest. Furthermore, it goes beyond arguments such as it increasing your social status or allowing you to buy nice things. It even goes beyond the counterarguments, which say higher salaries have decreasing returns to happiness. Instead, the point is that one should not be nonchalant about one’s salary – especially one’s starting salary.  This is because it also plays a crucial role in terms of signaling. Signaling here relates to a way in which an agent can convey information to a principal. Traditionally, this is seen in terms of a framework created by Michael Spence in which prospective employees (the agents) use their educational credentials to signal their skill level to potential employers (the principals).

This same logic applies to wages for several reasons. Once in an organization your wage, to a large extent, comes to reflect how your worth is perceived within the organization (whether it is accurate or not is another question). As such, wage increases become indicators of how good performance has been. These indicators in turn largely serve as the basis of who gets promoted which often, though not always, is the equivalent of saying which employees gets given more interesting work. In effect, the wage level one enters an organization with is very important. What tends to happen is that any promotion is decided in terms of a predetermined percentage. This means that if one went in too low, no matter how hard one works one remains boxed in to smaller increases in salary and perceived worth compared to someone who came in at a higher level. What is more, employers who agree to a “too high” starting salary tend to convince themselves that the decision was right in what has been called cognitive dissonance. The implication being that these employers often come to value the “overpaid” employees more, and provide them with more opportunities to demonstrate their worth. This can be used to one’s advantage.

In addition, your previous wage level becomes a good benchmark of what your worth was within your last place of work should you ever decide to switch. In this situation the prospect of good signaling is arguably even more significant. Effectively, a prospective employer is better able gauge what you are able to contribute not just based on your cover letter or CV but also based on how much your last employer deemed you were worth. Of course, this is industry specific meaning these benchmarks vary from career path to career path. Nonetheless, the logic applies whether one is working for Goldman Sachs or a NGO. This phenomenon of your initial salary being a good indicator of your future earnings has been documented in several studies.

Noteworthy is that this should not only be viewed in terms of wages but in terms of compensation. Higher compensation in general can also be a useful bargaining chip in negotiating. As work coach Ramit Sethi has advised one has to get creative when confronted with employers with low limits on the salaries they can offer. Specifically, Ramit suggests seeing if stock options, bonuses or other perks can be put on the table. Importantly, he also stresses that if one is going to compromise by accepting a low salary level, this should be used as leverage to already pin down future promotion discussions within a short time frame of being hired to avoid being boxed in (see above). This can all be used as a positive signal.

This all being said we have to appreciate that it is currently very difficult to get a job anywhere. As such, the above arguments should be taken with a pinch of salt if one is faced with an entry-level position offer that seems just a little bit too low. Nonetheless, it is important also to think long term. If you are starting a career in a specific company, and you are not planning on switching industry or getting a PhD in-between, the starting salary can have a large impact for your future salary and for the tasks that you come to do. Bearing this in mind, I will leave you with the advice of properly researching the salary level of the position you are applying for, and to not only practice for the interview but also for potential salary negotiations that could follow. Happy hunting!

Selected Bibliography:

– For newspaper articles etc., refer to hyperlinks

– Borjas, George, and Jan C. van Ours. Labour economics. McGraw-Hill Education, 2006.

– Brenner, Mashall H., and Howard C. Lockwood. “Salary as a predictor of salary: a 20-year study.” The Journal of applied psychology 49.4 (1965): 295.

– Festinger, Leon. A theory of cognitive dissonance. Vol. 2. Stanford university press, 1962.

– O’Shea, Patrick Gavan, and David F. Bush. “Negotiation for starting salary: Antecedents and outcomes among recent college graduates.” Journal of Business and Psychology 16.3 (2002): 365-382.

– Spence, Michael. “Job market signaling.” The quarterly journal of Economics87.3 (1973): 355-374.