How does your dollar in Colorado equal another in South Carolina? Will your dollar always be a dollar? What does a dollar equal in Russia? What will that dollar afford you in one place, but not another?
These questions are at the center of something called “purchasing power parity” or PPP. This theory allows economists to compare different currencies, along with changing relative costs. Your dollar tends to go further in more economically disenfranchised countries, and shorter in the higher economic zones. To put it simply, prepare for a tiny dollar in Europe, and a hefty one in sub-Saharan Africa.
With this statistic, we can actually understand purchasing power. Whenever we change locations, our power changes. Our relative expenditures fluctuate in tow. Sometimes it’s in our favor – other times we aren’t so lucky.
Purchasing power emphasizes the potential of a dollar spent, but what about a dollar earned?
Let me explain.
In 2015, the average American college student will graduate with more than $35,000 in loans. A horrific 71% of students will graduate with loans, too. These statistics are just the beginning for many hopeful grads.
Bankers and shockingly, the federal government, line up their coffers and wait for that beautiful “cha-ching” sound. Those students will pay for years; heck, likely decades. The interest-bearing loans will build more and more debt over time. And if they pursue a higher education – say a masters, Ph.D., M.D., or J.D. – it’ll mean thousands more.
Here’s an example: pretend “Benny” goes to undergrad for four years, and graduates with $35,000 in debt. He was a good student – some even called him great. His grades were strong, and he decided to apply to counseling psychology Ph.D. programs. Benny researched all the ins and outs about psychology. He decided that it was right for him. Benny would be able to study topics that interest him, practice counseling, and develop a teaching ability. It seemed like a win-win-win.
Years go by, and Benny has been going further into debt. By now, four years into his Ph.D. program, he has about $150,000 in student loans. But Benny has also settled on what he wants to do: practice counseling psychology as a clinician.
This much in the hole, the world appears rather bleak. But for Benny, he self-soothes by calmly reciting, “This is an investment in my future.” At least, that’s what everyone keeps telling him.
Then, he graduates and steps out into the bustling world of career opportunities! Solid five-figure salaries shine, and he gets ready to start a new future, pay off his debt, and maybe buy a new car. He finds a starting counselor position at $55,000 a year and gets the job. Now, he thinks, the good life can begin.
Remember how I started talking about PPP? Well, there’s a parallel version for income, too. I’ve never read it anywhere, though. I’ll call it “income power parity” or IPP.
IPP would represent the relative value of a salary, when you account for student debt, car loans, and other regular financial obligations. For Benny, his $55,000 salary hardly equals $55,000. Between paying the tax man, loans (car and student debt), and potentially starting a new family, buying a house, etc., his money dwindles.
It will take years to pay off these atmospheric amounts of debt. And every day that goes by, the interest ticks on. More money will be owed and/or paid off over time.
Here’s where income parity comes into play. Benny is a counselor, getting paid an average starting salary for someone with his education. If he had gone a different route and become a social worker, he would’ve graduated faster; thus, lowering his amount of possible debt. While the average salary for a social worker is less than a counseling psychologist, would it have been worth it for Benny to choose this route instead?
Effectively, social workers and counseling psychologists (clinicians) do the same work. One gets paid less than the other. But if one has to collect more debt than the other in the educational process, who actually gets paid more? Who can save, invest, and collect more than the other in the long run?
These questions get at the heart of income parity concerns. With more than a trillion dollars in total debt, students are burdened with one of the toughest economic questions ever. They need to stare at salaries and ask, like no generation before them, “Yeah but, how much am I really going to make?”
