Compensating differentials represent a wage premium for unpleasant aspects of a job. Jobs differ along several dimensions. Some jobs offer generous health insurance benefits. Others entail long hours or may expose workers to physical risks. Some are available only in polluted cities. In equilibrium, labour markets accommodate diversity by establishing wages that tend to make different jobs relatively close substitutes at the margin. Using hedonic wage regression techniques, researchers have estimated the equilibrium implicit market price that workers pay, through lower wages, for working in a more pleasant setting. This technique is widely used by labour and environmental economists.
Compensating differentials Hedonic wage function Labour economics Rosen, S. Superstars, economics of Unobserved skill Urban economics Urban environment and quality of life Wage heterogeneity, sources of Wage premium Worker heterogeneity
This is a preview of subscription content, log in to check access.
Ekeland, I., J. Heckman, and L. Nesheim. 2004. Identification and estimation of hedonic models. Journal of Political Economy 112: S60–S109.CrossRefGoogle Scholar
Gruber, J. 1994. The incidence of mandated maternity benefits. American Economic Review 84: 622–641.Google Scholar
Gyourko, J., and J. Tracy. 1991. The structure of local public finance and the quality of life. Journal of Political Economy 91: 774–806.CrossRefGoogle Scholar
Hwang, H.-S., R. Reed, and C. Hubbard. 1992. Compensating wage differentials and unobserved productivity. Journal of Political Economy 100: 835–858.CrossRefGoogle Scholar
Rosen, S. 1974. Hedonic prices and implicit markets: Product differentiation in pure competition. Journal of Political Economy 82: 34–55.CrossRefGoogle Scholar