Estimated compensating wage differentials

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(b) Critically appraise the findings of empirical studies that have estimated compensating wage differentials.

Compensating differential is a term used in labor economics to analyze the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A compensating differential, which is also called a compensating wage differential or an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform. One can also speak of the compensating differential for an especially desirable job, or one that provides special benefits, but in this case the differential would be negative: that is, a given worker would be willing to accept a lower wage for an especially desirable job, relative to other jobs.

The idea of compensating differentials has been used to analyze issues such as the risk of future unemployment, the risk of injury, the risk of unsafe sex, and the monetary value workers place on their own lives. (Wikipaedia)

A lot of models have been presented by different authors of the world regarding compensating wage differentials and a lot of studies have been made as well. Based on these studies, surveys and analyses findings have been published in the journals, newspapers and websites. These publications stressed on the compensating wage differentials not only for the workers exposed to death due to accidents but on the other reasons as well. The term ‘Risk Premium' is also used as an alternative to the compensating wage differentials for the workers doing dangerous jobs.

Marin and Psacharopoulos (1982), in the first paper using British data from the Office of Population Censuses and Surveys (OPCS) Occupational Mortality Decennial Supplement 1970-72, find evidence of a wage premium for exposure to fatal risk. Sandy and Elliott (1996) and Arabsheibani and Marin (2000) using similar data over the period 1979 to 1983, and Siebert and Wei (1994) using Health and Safety Executive (HSE) data for 1986 to 1988, all find evidence of a fatal risk premium.

Another study has been made in the Hong Kong regarding compensating wage differentials giving special emphasis on the risk associated with the workplace fatality. The data has been collected from the 1991 census and then it has been merged with the accident data provided by the Labour Department.

A theory has been presented by Thaler and Rosen in 1976. The estimation of compensating wage differentials has been carried out with the following formula

W = a0 + a1X + a2p + e

Where w is the wage rate, X a vector of individual and job characteristics, including the usual human capital variables; p is a measure of job risk and e is an error term. Over the past two decades studies have estimated compensating wage differentials by using this equation. The result normally suggests that a positive and significant compensating wage differential for the jobs with mortality risk is found majorly in the United States, United Kingdom, Canada, Australia and Japan.

Another important factor the compensating wage differentials has been identified as; child penalty'. The fact that mothers tend to earn less than women without children seems to be well established in the economic literature and is called child penalty or family gap. Several researchers found raw wage gaps of almost 20% for the US, 13% for the UK and up to 20% for Germany.

In order to investigate the impact of motherhood on the choice between pecuniary and non-pecuniary job characteristics the German Socio-Economic Panel (GSOEP; 1984-2003) was used by Christina in 2006. The sample of interest consists of women during their fertile period, defined as the age from 16 to 46. The dataset provides detailed information about personal and job characteristics, about pecuniary and in particular non-pecuniary ones. Besides it reports satisfaction with the job what is used as a proxy for utility and allows testing if both pecuniary and non-pecuniary job characteristics determine jointly the satisfaction of a mother. The longitudinal nature of the data allows observing mothers around first birth.

The dataset used is the German Socioeconomic Panel (GSOEP), which is a yearly repeated survey of Germans and Foreigners in West and East Germany (1984-2003). Since 1984 the GSOEP follows the members of the panel. In 2003 the GSOEP provided information about more than 12000 households consisting of more than 24000 people

In order to test the hypothesis of the child penalty as a compensating wage differential, the following

methodology, divided in three parts, has been conducted.

A first step was to investigate if motherhood really affects the job characteristics, i.e. if not only the pecuniary but also the non-pecuniary job characteristics change after motherhood and thus the loss of wage might be compensated with an increase in amenities. In order to estimate changes in job characteristics around and after motherhood, an event study analysis has been used which studies the effects of first birth on a variety of job characteristics. A second necessary step was to show if and how certain job features enter the utility of mothers. According to theory of compensating wage differentials both pecuniary and non-pecuniary characteristics determine jointly the utility of a worker. In case a mother is willing to give up part of her income in order to have a more family friendly job, certain job characteristics have to compensate for this loss in wage and thus raise the utility of a mother. In order to test this empirically satisfaction regressions has been used. In a last step the actual compensating wage differential has been measured, i.e. how much of their wage mothers is willing to give up for having a job with more amenities (less disamenities). Therefore as a last step a hedonic wage regression has been run including certain (dis-)amenities as control variables.

The conclusion of the above discussion reveals that the compensating wage differentials have been studies by many of the analysts around the globe using different methodologies and statistics. These studies helped the users understanding the trend regarding compensating wage differentials and the impact on workers.



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