Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications
Journal of Economic Perspectives
vol. 37,
no. 3, Summer 2023
(pp. 189-212)
(Complimentary)
Abstract
The model of compensating wage differentials is among the cornerstone models of equilibrium wage determination in labor economics. However, empirical estimates of compensating differentials have faced persistent credibility challenges. This article summarizes the Rosen model of compensating differentials and chronicles the advances, setbacks, and lessons learned from empirical studies. The progression from cross-sectional to panel models alleviated biases caused by unobserved human capital but yielded new insights into the importance of other biases, including those caused by labor market frictions and endogenous job mobility. I discuss recent approaches that use matched employer-employee data and quasi-random variation in job amenities to address some of these challenges. I then present two examples of applications of compensating differentials: the evaluation public health and safety policies that rely on the value of statistical life, and the measurement and interpretation of earnings inequality.Citation
Lavetti, Kurt. 2023. "Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications." Journal of Economic Perspectives, 37 (3): 189-212. DOI: 10.1257/jep.37.3.189Additional Materials
JEL Classification
- J17 Value of Life; Forgone Income
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J28 Safety; Job Satisfaction; Related Public Policy
- J31 Wage Level and Structure; Wage Differentials
- J41 Labor Contracts
- J82 Labor Standards: Labor Force Composition
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