Abstract
The empirical literature on compensating wage differentials has a mixed history. While there have been some successes, much of this research finds weak support for the theory of equalizing differences. We argue that this weak support is the result of bias due to dispersion in total values, or job dispersion. We begin with two contrasting examples to demonstrate how dispersion in wages and non-wage values of jobs can lead to biased hedonic estimates of the marginal-willingness-to-pay (MWP) for non-wage characteristics. Next, we quantify this bias by estimating a structural on-the-job search model that allows jobs to be differentiated by both wages and job-specific non-wage utility. Using simulated data from the model, we conduct a detailed analysis of the sources of bias in traditional hedonic wage estimates. Estimates of the MWP for non-wage characteristics are severely attenuated. While worker heterogeneity and dynamics are important sources of bias, a significant proportion can only be explained by randomness in offers.
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