Do Elite Universities Overpay Their Faculty?

In most industries, some firms pay more than others—even for seemingly similar workers. Economists have shown that otherwise similar employees who move to higher-paying firms typically receive wage increases, while those moving to lower-paying firms experience comparable losses (Bagger and Lentz, 2019; Moscarini and Postel-Vinay, 2018; Haltiwanger et al., 2018, Abowd et al., 1999). These persistent differences across employers are often interpreted as firm wage effects or rents. These are firm-specific wage premiums captured by workers.

Universities appear to fit this pattern. There is a clear prestige hierarchy, and faculty at elite institutions earn higher salaries on average. But in our paper, we show that elite universities do not systematically pay more for the same faculty. Instead, they pay more because they hire more productive academics. In fact, we find very little evidence of any significant university pay premia in the US academic market.

Higher academic salaries reflect better faculty quality

As in other sectors, academic salaries are strongly correlated with institutional prestige. Faculty at top-ranked universities earn more on average, and these institutions have greater resources and visibility.

Higher salaries at these universities can result from firm-level pay premiums — paying higher salaries to all their faculty — or from hiring higher-quality faculty. To understand whether universities themselves pay more, we need to compare what the same faculty member would earn across institutions. We distinguish between these two stories using survey data from the Survey of Doctorate Recipients, which allows us to observe STEM faculty job and salary histories.

By following the same person across jobs, we can separate what the employer pays from what the employee is worth. If elite institutions pay genuine premiums, we would expect salaries to rise whenever someone moves to a more prestigious university—and fall whenever they move down.

We find that university-specific pay premiums explain very little of salary variation. Most of it comes down to individual faculty characteristics. In other words, elite universities do not pay a meaningful premium for identical academics. Even when comparing the most and least prestigious institutions, the implied salary differences—holding faculty quality constant—are modest, around 15%. Thus, the observed salary differences reflect who institutions hire.

Worker mobility in academia looks very different from other labor markets

Academic careers also exhibit mobility patterns that differ from the broader labor market. In most labor markets, workers tend to move up the job ladder, and moving down typically comes with a pay cut (Card et al., 2018). In academia, neither holds: moves up and down the prestige hierarchy are equally common, and salaries tend to increase after a move regardless of direction. Faculty moving to less prestigious institutions often receive substantial pay increases.

Why is academia different?

We argue that two key features distinguish academia from most labor markets:

1. High information about productivity Academic output (publications, citations, grants) is highly visible, allowing institutions to assess researchers’ quality early in their careers.

2. Scarce and irregular job openings
   Departments hire infrequently and often in narrow fields, meaning that good matches are not always available when candidates enter the market.

These features lead to a labor market shaped by mismatch and gradual improvement. Initial placements are often imperfect—the right candidate and the right department don’t always meet at the same time. When academics do move, whether up or down the prestige ladder, the match typically improves, translating into higher productivity and higher salaries.

This can explain both the symmetric mobility pattern and the limited role of institutional rents. If a better fit drives moves in either direction, both directions should be associated with pay increases—which is exactly what we find. And if salaries reflect worker quality rather than employer generosity, there is little room for rents to accumulate.

Implications

Our findings suggest that academia operates under a different logic than most labor markets. Employer-specific pay premiums play a limited role; talent sorts strongly across institutions, and mobility is driven by match quality rather than climbing a prestige ladder.

More broadly, the results highlight how information and the timing of job opportunities shape labor market outcomes.

Elite universities do not necessarily pay more. They employ faculty who would earn more almost anywhere.

References

• Abowd, J M, F Kramarz and D N Margolis (1999), “High wage workers and high wage firms”, Econometrica 67(2): 251–333.
• Bagger, J and R Lentz (2019), “An empirical model of wage dispersion with sorting”, The Review of Economic Studies 86(1): 153–190.
• Card, D, A R Cardoso, J Heining and P Kline (2018), “Firms and labor market inequality: Evidence and some theory”, Journal of Labor Economics 36(S1): S13–S70.
• Haltiwanger, J C, H R Hyatt, L B Kahn and E McEntarfer (2018), “Cyclical job ladders by firm size and firm wage”, American Economic Journal: Macroeconomics 10(2): 52–85.
• Moscarini, G and F Postel-Vinay (2018), “The cyclical job ladder”, Annual Review of Economics 10(1): 165–188.