45: Pick the right industry

A famous bank robber was once questioned by the police after being caught yet again. When asked why he kept robbing banks he simply replied, "That's where the money is[1]." ?He was onto something. Not only do banks attract robbers, but they also offer salaries that are often above the industry average. If you're aiming for a higher-than-average paycheck, working in finance might be a good choice, as salaries in banking tend to be higher than in many other sectors for similar roles[2].

Richard H. Thaler, a Nobel-winning economist, explored this concept in his book?The Winner's Curse.?He noted how his own assistant left a university job to work at IBM, doing nearly the same work for 20% more pay. This observation contradicted the "law of one price," which suggests that the same work should, in theory, be compensated at the same rate across industries. Thaler, and other economists, found that different industries indeed pay different amounts for similar roles, with these variations having persisted over decades. Studies also showed that higher-paying industries often have lower turnover rates, indicating employees feel they are compensated above their opportunity cost.

Several factors drive these differences, including industry size, profit margins, growth potential, and unionization (historically, unionized companies tended to offer better salaries, even for management). Because your company competes in an industry, and each industry has different dynamics, perspectives, growth (or decline), there are industries with more money, and industries with less money. Michael Porter’s model to assess an industry is still best in class[3]. Broadly speaking, industries that have high level of competition, and therefore the companies participating in those, need to be focused on keeping costs low, and so pay their employees less.

Although this isn't a research paper, the key takeaway is that wage differences can be as high as 20% and they can last for a long time[4]. Ultimately also looking back to the last 20 years, or the last 2000 years, some industries can produce above average profits and others can’t. If the industry produces above average profits, there is also something for the employees.

Industries where people don’t want to work tend also to pay well but you might not like working in the tobacco or weapon industry. And, of course, there's always the banks.

If money is not everything for you then pick an industry that makes something useful for society: renewable energy, food, clothing (not fast fashion), education or transport but beware the pay might not be as good!

[1] This is not fully accurate because the phrase "I rob banks because that's where the money is" whilst it is commonly attributed to American bank robber Willie Sutton is not his. In his 1976 autobiography, Sutton denied ever making this statement, suggesting it was fabricated by a reporter. Despite the denial the quote has remained associated with him.

[2] Here's a comparison of average annual salaries for select professions in various UK industries; the finance sector tends to come on top.

1. Software Engineer: Technology Sector:?Approximately ￡50,000 to ￡70,000/ Finance Sector:?Around ￡60,000 to ￡80,000/ Healthcare Sector:?Typically ￡45,000 to ￡65,000.

2. Financial Analyst: Investment Banking:?Approximately ￡60,000 to ￡80,000/ Corporate Finance:?Around ￡50,000 to ￡70,000/ Public Sector:?Typically ￡40,000 to ￡60,000.

3. Marketing Manager: Consumer Goods Industry:?Approximately ￡50,000 to ￡70,000/ Technology Sector:?Around ￡55,000 to ￡75,000/ Non-Profit Sector:?Typically ￡40,000 to ￡60,000.

4. Project Manager: Construction Industry:?Approximately ￡50,000 to ￡70,000/ IT Sector:?Around ￡55,000 to ￡75,000/ Healthcare Sector:?Typically ￡45,000 to ￡65,000.

5. Human Resources (HR) Manager: Financial Services:?Approximately ￡60,000 to ￡80,000/ Manufacturing Industry:?Around ￡50,000 to ￡70,000/ Education Sector:?Typically ￡45,000 to ￡65,000.

These figures are approximate and can vary based on factors such as experience, location, and company size. For more detailed and up-to-date salary information, resources like the?Reed?UK?Salary?Guides 2024?and the?Office?for?NationalStatistics' EARN03 dataset?provide you insights into average earnings.

[3] https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx

[4] Krueger and Summers proved that there were material differences for essentially the same job, and they remained constant over a period of 40 years!

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