Arnold Kling  

Investment Bankers, Dentists, and the Inequality Puzzle

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Of Bones and Pomeranian Grenad... Tyler Cowen on Income Inequali...

Robert H. Frank writes,


But the biggest winners of all have been top earners in the financial services industry. Thus, according to Institutional Investor’s Alpha magazine, James Simons, a hedge fund manager, earned $1.7 billion last year, and two other hedge fund managers made more than $1 billion. The combined income of the top 25 hedge fund managers was over $14 billion in 2006.

...Most dentists today earn little more than their counterparts from 1979, but the best paid dentists earn almost three times as much.


The pointer comes from Greg Mankiw, who wonders how dentistry can be a superstar market.

A couple of possibilities. First, dentistry is not much fun, so that if you happen to enjoy it or are willing to work hard in spite of not enjoying it, maybe you can earn more than the typical dentist.

But the other possibility is that there are spillovers from inequality in part of the economy to inequality in other parts of the economy. Once you have rich people, then service providers who cater specifically to the rich may be able to charge higher prices. My guess is that a popular dentist in Beverly Hills or Bethesda can charge a lot more than the best dentist in Peoria.

As long as there are actual or perceived differences in quality of service, my guess is that there are rents to be earned from establishing a good reputation with the super-affluent. This is probably as true for Greg Mankiw's employer as it is for dentists and other professionals.

So, once you have some inequality to begin with, that inequality can spill over into service industries where providers can acquire reputations among the rich. That may account for some of the rents earned by the richest investment bankers, as well. Corporations and wealthy individuals will pay a premium for a reliable investment banker or hedge fund manager, which creates a differential between earnings at the top tier and earnings of those who have not yet established stellar reputations.

And of course, this ties in with the whole issue of college education and signalling. The story I'm telling for the superstar phenomenon is a signalling story. The fact that you are the dentist for some rich folks will be a signal to other rich folks that you are a reliable dentist. Relative to people on modest incomes, rich people may be particularly sensitive to signals and insensitive to price.

It could be that employers who require a college degree are particularly sensitive to signals and insensitive to cost. They are more worried about wasting management time and training effort on a lousy hire than they are about over-paying for skills.


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CATEGORIES: Income Distribution



COMMENTS (6 to date)
Jack D writes:

$500 haircuts anyone?
This story makes sense and more importantly should be empirically testable. As Ed Leamer would say, know your data...
If Robert Frank (or anyone else) is gung-ho about the issue, he needs to look at the data beyond the simple distribution.

Robert A. Book writes:

There are several possible reasons for income inequality within dentistry:

First, licensing restrictions -- and thus barriers to entry -- differ widely across states. For example, most states participate in regional reciprocal licensing, but Delaware (a state too small to have its own dental school!) does not. Delaware also requires -- before taking the exam -- three years of dental practice (presumably in another state) or an internship. Most other states have no such requirement. Plus, to take the exam you need to either have a job lined up in Delaware, or be a Delaware resident already, before you take the exam. (And the exam is held in Pennsylvania!)

The result: Dentists in Delaware have incomes about three times the national average for dentists. They also have a "dentist shortage." Hah!

Second: Dental practices are not homogeneous. There are sedation dentists, cosmetic dentists, "dental spas," oral surgeons, orthodontists, in addition to general dentists. All those count as "dentists." Dentists who run "dental spas" probably make a lot more money than general dentists.

(How do I know this? I'm an economist, and I had a dentist in my class this past term. ;-)

Me writes:

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Floccina writes:

The real thing that interests me here is the relative earning of dentist and veterinarians to doctors. Dentists are cheap veterinarians are very cheap. I had a very sick dog (and my wife was much more sensitive to the dog than me) operations for dogs are cheap. The differences IMO reflect the doctor licensing has kept the supply low, insurance has insulated the customers from the cost and malpractice suits have added lots of costs. Dentists still prescribe penicillin, they will operate – do a root canal for about $600 and the have face many of the problems of doctors, competition is a wonderful thing.

Matt writes:

I high school student once told me he wanted to be rich, and asked me what the best career was. I told him, if you really want to be rich, go where the rich people are. They pay higher prices for everything, from real estate agents to (as I now know) dentists.

Steve Sailer writes:

Dentists deserve much praise for promoting fluoride in water and toothpaste at their own expense. The number of cavities has dropped dramatically -- my kids have never had any, while I must have had a dozen -- which has reduced demand for dentistry sharply.

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