Question

At a university faculty meeting, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. True or False: In the long run, this increase in housing benefits will make faculty positions more attractive than other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.) True False

Answer 1

FALSE

The indifference principle states that, in the long run, if an asset is mobile, then it will be indifferent about where it is used. That is, the asset will earn the same profit no matter where it goes.

How does the indifference principle apply to this occupation in the long run?

When applied to the labor market, the indifference principles imply that wages will adjust to restore equilibrium. In this case, an increase in some non-salary benefits (such as housing benefits or health care benefits) makes the faculty position more attractive relative to other occupations. However, over the long run, as more people seek to become faculty members, the supply of labor in this occupation will increase, driving down wages in the occupation. At the same time, the supply of labor will decrease in other industries, as individuals in those industries (or individuals who would have entered those industries) seek to become faculty members. Thus, wages in other industries rise.

The wages of new faculty members will continue to fall until faculty jobs are just as attractive as any other job. At this point, there is no incentive for individuals to continue to enter the college teaching profession, and the labor supply for faculty positions will stop increasing. Since the supply of labor has stopped increasing, wages stop decreasing. At this new equilibrium, despite the increase in benefits, wages have adjusted downward so that faculty jobs are equally attractive as other jobs.

At the same time, when people in other businesses (or people who would have entered other industries) seek employment as faculty members, the supply of labor in those other industries will decline. As a result, other industries' pay increases.

New faculty members' salaries will keep declining until they are competitive with other occupations. The labor supply for professor posts will eventually run out because there is no longer any incentive for people to pursue careers as college teachers. Because the labor supply is no longer growing, wages are no longer falling. Despite the rise in perks, wages have moved lower at this new equilibrium, making faculty jobs just as desirable as other jobs.

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