Business Dictionary (reference below) defines compensating differential (also called compensating wage differential or equalizing difference) as the difference in wages offered to offset the desirability or undesirability of a job.
“If the job is considered undesirable because of elements of unpleasantness or risk, the differential is positive in the form of increased wages to offer incentive to the employee to take the job. If the job is considered especially desirable, the differential is negative in the form of lower
Alex Tabarrok (references below, videos above and to right) explores the relationship between fun and wages and between workplace safety and wages.
Tabarrok notes that there is a tradeoff between fun and wages, and the market will result in Not Fun jobs having lower wages than Fun jobs. Tabarrok argues that this is an example of the economic principle of There Ain’t No Such Thing As A Free Lunch – TANSTAAFL.
Tabarrok illustrates this with the comparison of wages between the Alaskan and the Gulf of Mexico fisheries.
He argues that the increase in workplace safety over time in wealthy countries is due less to government regulations and union demands than to the profit motive and a labour market where workers are better compensated and have more options.
He notes that market forces only operate to increase workplace safety when workers know the risks.
- Let’s apply the idea of compensating differentials to janitorial jobs. Suppose there are two quite similar restaurants in the same town, Orange Bee’s and the City Inn. Both have the same demand for janitorial labor. But all the janitors in town know that it’s much more fun to work at City Inn. Which restaurant will pay a higher wage for janitors?
- According to the theory of compensating differentials, which low-skilled jobs in the United States will tend to pay the most: The safe jobs or the dangerous jobs?
BusinessDictionary.com, compensating differential, at http://www.businessdictionary.com/definition/compensating-differential.html, accessed 9 May 2016.
Alex Tabarrok, The Tradeoff Between Fun and Wages (3-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/human-capital-wages-education-globalization, accessed 9 May 2016.
Alex Tabarrok, Compensating Differentials (5-minute video), Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/compensating-differentials-wages, accessed 9 May 2016.
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Page created by: Ian Clark, last modified on 19 May 2016.
Image: Alex Tabarrok, from the videos cited above.