Compensating Wage Differentials Research Articles

Carbon emissions and CEO pay

AbstractOur study examines the link between firms' carbon emissions and their compensation to CEOs and finds a positive association in line with the compensating wage differentials theory. We use Donald Trump's 2016 election win as an exogenous shock to identify a causal relationship. Ruling out managerial power as an alternative explanation, the relations are stronger when firms are better governed and are more likely to be aware of their carbon risk. Additionally, we present evidence that high carbon emissions increase CEOs' risk of job loss, reinforcing the presence of compensating wage differentials as the plausible explanation for the positive association.

This must be the place: local amenities and superstars’ wages

AbstractWe investigate the role of local amenities in shaping compensating wage differentials in labor market populated by high-skilled workers. Using 10 years of longitudinal data on workers productivity along with information on firms and location amenities, we evaluate whether workers are willing to pay to join a better firm and if firms with undesirable attributes must provide higher wages to attract workers. By accounting for unobserved workers heterogeneity, we show that superstars receive positive wage differentials for lower location amenities as well as riskier employments.

Compensating wage differentials: Evidence from the National Hockey League

Using data for 1,471 unrestricted free agent player contracts in the NHL, this paper finds evidence that players are willing to sacrifice earnings to play on a higher quality team, and this tradeoff increases with player age. This result, which is consistent with the theory of compensating wage differentials, is robust to multiple specifications and estimation methodologies.

Labour Market Preferences of Retrenched Australian Auto Industry Workers for Job Quality and Meaningful Work*

This study uses stated preference experiments to examine labour market preferences of 309 workers retrenched by the Australian automotive industry for non‐pecuniary job attributes denoting job quality and meaningfulness. We find that autonomy and employer reputation for good work policies and practices are the two most important non‐pecuniary job attributes, with compensating wage differentials of roughly $5 per hour for greater autonomy and better employer reputation. Job security and skill utilisation are also important, but less so, with compensating wage differentials between $1 and $3 per hour for greater security and fewer training requirements. Workers' strongest preference is not for a particular type of work, but rather for a particular type of employer, suggesting that labour market policy might pay more attention to regulating the quality of workplaces.

Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications

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.

Employee Costs of Corporate Bankruptcy

ABSTRACTAn employee's annual earnings fall by 13% in the first full calendar year after her firm's bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre‐bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are up to 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable in magnitude to debt tax benefits. Thus, wage premia for expected costs of bankruptcy are sufficiently large to be an important consideration in capital structure decisions.

Dynamic Aggregation of Wages and Job Risk: A Case Study of Pakistan

This study examines the relationship between job risk and wages in Pakistan using data on fatal and non-fatal occupational injuries. By employing the Hedonic Wage Function (HWF), the study estimates the Value of Statistical Life (VSL) for Pakistan. Additionally, the Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) techniques are used to analyze the wage-risk nexus dynamics and estimate the VSL from 1990 to 2019. The results reveal a positive relationship between job risk and wages, suggesting that workers in Pakistan are compensated for the risks associated with their jobs. Furthermore, the VSL estimated in this study is higher than in previous studies, indicating that workers in Pakistan value their safety more and are willing to pay more to reduce their risk of occupational injury. These findings confirm the hypothesis of Compensating Wage Differential (CWD) for Pakistan and underscore the importance of developing efficient occupational safety and health systems to protect workers and promote economic growth.

Estimating the Value of Gender- and Race-Specific Job Injury Risk

AbstractThe compensating wage differential (CWD) for nonfatal injury and value of statistical life or injury in occupations have rarely been analysed separately by gender or race. This paper uses individual-level data from the 2012–2015 March Current Population Survey to estimate the CWD as well as the value of statistical injury (VOI) by race and gender. We find male workers command a positive risk premium, and this is higher when they are unionised. We also find a positive risk premium for White unionised workers and a slightly lower risk premium for White males. Like other investigators, we find that nonfatal risk is heterogenous, and its compensation is difficult to estimate using a standard wage equation, even with some smaller subsamples from our dataset that are gender- or race-specific. Our estimates of the VOI show us that male workers who are unionised have the highest VOI, followed by Hispanic union workers, and Black females. This last finding follows from Black females working in jobs that have the highest risk rates compared to White and Hispanic females.

Estimating the value of life expectancy gains in Tanzania using the life satisfaction and model based approaches.

Policymakers in low and lower-middle income countries often face difficult trade-offs between saving lives and livelihoods, as exemplified by the COVID-19 pandemic. Yet, evidence regarding the preferences of the population is often lacking in such settings. In this paper, I estimate the value of an additional year of life expectancy in Tanzania using information on subjective well-being and population mortality. More specifically, I combine age-sex specific subnational estimates of remaining life expectancy with data from a representative household survey, which includes information on consumption expenditures and life satisfaction. This information is then carried forward into a life satisfaction regression to estimate the trade-off between consumption and an additional year of life expectancy. The results imply that a representative individual from the sample would be willing to trade off around 9% of their annual consumption expenditure to obtain an additional year of remaining life expectancy. The estimated values are close to those derived from calibrated models based on different elicitation methods, such as revealed preferences. This suggests that life satisfaction measures could be useful in deriving estimates of the value of longevity changes in environments where traditional methods, such as estimating compensating wage differentials, are difficult to apply.

The Balassa-Samuelson model with job separations

We incorporate sectoral job separation rates in a small open economy model to examine the Balassa-Samuelson (B-S) effect. Unequal separation rates give rise to compensating wage differentials. We simulate the model for Japan and replicate a feature of its economy that the nontradeables sector has higher wages and a higher separation rate compared to the tradeables sector. With productivity growth in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. The B-S effect is dampened. With a higher separation rate in the nontradeables sector, higher wages in the nontradeables sector amplifies this labour movement. Nevertheless, unemployment always falls due to a positive income effect. In contrast, the effect of productivity growth in the nontradeables sector is to lower the real exchange rate and raise unemployment.

Gender differences in sorting on wages and risk

We use Brazilian matched employer–employee data to provide new evidence on gender disparities in labor market sorting on wages and workplace safety. We show that women and men sort in highly disparate, but systematic, ways on the basis of physical risk, despite sorting almost identically on financial risk. To understand what factors might explain these gender differences in sorting, we begin by ruling out the possibility that men and women receive different compensating wage differentials for risk. We find that women do earn smaller establishment wage premia than men on average, but this difference is also unlikely to explain the sorting patterns. Despite having little direct effect on wages, sorting on safety may have large indirect effects on the wage gap through its outsized influence on the segregation of women and men across establishments. This segregation results in men earning substantially higher establishment wage premia, which explains 28% of the entire gender wage gap in Brazil.

The motherhood wage gap and trade-offs between family and work: A test of compensating wage differentials

The theory of compensating wage differentials may explain part of the motherhood wage gap if mothers are more likely than childless women and men to make a trade-off between monetary and non-monetary rewards when looking for a job. Whereas previous studies focus primarily on jobs that employees currently hold, we present a more accurate test of this theory by studying the extent to which childless (wo)men, fathers and mothers trade off wages and family-friendly working conditions (flexibility, no overtime) in looking for a new job. Using a unique vignette experiment in four European countries (N = 7040), we find that the theory of compensating wage differentials is not supported. When presented with fictional job-openings that vary randomly on family-friendly working conditions and wages, mothers are not more likely than fathers or childless men and women to choose jobs with more family-friendly working conditions and lower pay. Instead, we find that mothers are more likely to apply for jobs with lower wages regardless of other job characteristics. These results suggest that the motherhood wage gap may not be explained by compensating wage differentials, but by mothers’ higher likelihood of applying for jobs with lower wages.

Compensating Wage Differentials for Job Fatality and Injury Risk in Australia*

This study explores whether compensating wage differentials (CWDs) are still found for Australian workers using data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, and risk data from Safe Work Australia. Our study finds evidence of CWDs for the risk of workplace fatalities that are smaller in magnitude compared to the estimates previously reported in the 1990s for Australia. We find limited evidence of CWDs for the risk of workplace non‐fatal injuries. Using panel data and a risk variable that varies by both the worker’s industry and occupation of employment, we find that Australian workers who face the mean level of fatality risk receive a CWD of between 0.13% and 0.44% for a unit increase in risk, depending on the model specification. These estimates correspond to a value of statistical life of $9.7 million and $34.9 million.

Unemployment Insurance as a Subsidy to Risky Firms

Abstract We document that a more generous unemployment insurance (UI) system shifts labor supply from safer to riskier firms and reduces the compensating wage differentials that risky firms need to pay. Consequently, a more generous UI system increases risky firms’ value and fosters entrepreneurship by reducing new firms’ labor costs. Exploiting a UI reform in Brazil that affects only part of the workforce allows us to compare labor supply for workers with different degrees of UI protection within the same firm, sharpening the identification of the results. Altogether, our results suggest that UI provides a transfer system from safe to risky firms.

Who took gig jobs during the COVID-19 recession? Evidence from Uber Eats in Japan

The main purpose of this study is to examine gig workers in transportation sectors, especially focusing on workers in food delivery services, who had increased during the COVID-19 recession. By using a unique survey of 188 Uber Eats delivery persons in Japan conducted from October 2020 to January 2021, we analyze the features and labor supply behavior of the delivery persons who took the jobs during the COVID-19 recession. We found that more job losers, lower income earners and more manual workers, who are considered to be more negatively impacted by the pandemic, entered the food delivery service market during the recession. We also found that at least one-third of delivery persons worked at an hourly wage below the minimum wage, and those workers were highly concentrated in the workers who joined the market after the pandemic became severe. Based on the theory of compensating wage differentials, our analysis using hypothetical questions also found that such workers are more willing to accept jobs at lower hourly wages than those who started working at Uber Eats before COVID-19 was recognized, even under poor working conditions, such as downpours or fatigue. Our findings suggest that the gig economy, such as food delivery services, acts as an outlet for low-income and unemployed persons during recessions, indicating that such work may serve as a buffer to smooth income against business cycles. However, ample labor suppliers who are eager to take jobs with less money may exert additional downward pressure on wages during recessions.

Compensating wage differentials in formal and informal jobs

AbstractWe link the dearth of empirical support for the theory of compensating wage differentials (CWD) to minimum wages and other labour market regulations. As these labour market regulations matter less for informal jobs, we hypothesise that CWD for adverse working conditions are more likely to be observed in these jobs relative to formal jobs. This is tested based on teenage employment data. The results are in line with our hypothesis. While informal jobs pay, on average, lower wages than formal jobs, a substantially higher premium for physically demanding and hazardous working conditions is found in informal jobs. This finding is robust against several sensitivity checks with respect to the identification method and measurement of the independent variables. Our results are also consistent with minimum wages being the key underlying mechanism for this difference in wage setting between formal and informal teenage jobs.

Tastes for discrimination in monopsonistic labour markets

This paper presents a model where wage differences between men and women arise from taste-based discrimination, monopsonistic mechanisms and gender differences in compensating wage differentials. We show how preferences against women affect heterogeneity in firms’ pay policies in the context of an imperfect labour market with non-wage amenities, deriving a test for the presence of taste-based discrimination and of compensating wage differentials. These results inform an analysis of sex pay differences in the Italian manufacturing sector, which shows that preferences for workplaces providing more flexible schedules are a significant determinant of the gender wage gap. Taste-based discrimination mechanisms appear to be significant as well, but small in size.

Employee Costs of Corporate Bankruptcy

An employee’s annual earnings fall by 10% the year her firm files for bankruptcy and fall by a cumulative present value of 67% over seven years. This effect is more pronounced in thin labor markets and among small firms that are ultimately liquidated. Compensating wage differentials for this “bankruptcy risk” are approximately 2.3% of firm value for a firm whose credit rating falls from AA to BBB, about the same magnitude as debt tax benefits. Thus, wage premia for expected costs of bankruptcy are of sufficient magnitude to be an important consideration in corporate capital structure decisions.

A note on the estimation of job amenities and labor productivity

This paper introduces a maximum likelihood estimator of the value of job amenities and labor productivity in a single matching market based on the observation of equilibrium matches and wages. The estimation procedure simultaneously fits both the matching patterns and the wage curve. While our estimator is suited for a wide range of assignment problems, we provide an application to the estimation of the Value of a Statistical Life using compensating wage differentials for the risk of fatal injury on the job. Using US data for 2017, we estimate the Value of Statistical Life at $6.3 million ($2017).

Pesticide exposure and the physical and economic health of US crop workers.

We examine the impact of pesticide exposure on crop worker health and earnings using 2002 through 2016 data from the US Department of Labor, Employment, and Training Administration's National Agricultural Workers Survey. Our findings show that pesticide exposure is positively related to certain health conditions and that wage patterns are consistent with compensating wage differentials. The offsetting impacts of these equilibrium aspects are limited by how wage premia for assumed health risks depend on worker bargaining power and agency. We document differences for undocumented versus documented workers with implications for compensation and occupational health policies in this labor-intensive, essential sector.