Compensating Wage Differentials Research Articles

Who values the family-friendly aspects of a job? Evidence from the Japanese labour market

Women with family responsibilities such as child-rearing generally prefer jobs with flexible working conditions. According to the theory of compensating wage differentials, women working in such family-friendly jobs are paid less than those working in family-unfriendly jobs. The present paper investigates whose wages are more greatly affected by the family-(un)friendly aspects of their jobs. Based on a longitudinal survey of Japanese women, we found that among several family-(un)friendly attributes of a job, only commuting time requires a wage premium, and most of the premium is associated with job changes made by part-time-working married women.

Does unemployment affect compensating wage differentials for work-related fatal injuries? Empirical evidence from occupational data

The study examines the hypothesis that high unemployment rates in local labour markets weaken the bargaining power of workers and reduce the wage premium given to compensate for the risk of death in the workplace. Analysis of fatal occupational injury risk and demographic data from the Bureau of Labour Statistics (BLS) and the Current population Survey (CPS) over 2004 to 2007 finds strong evidence for this hypothesis. Results show that both blue-collar union and nonunion workers are likely to receive a lower wage premium in locations where unemployment rates are high. They also indicate that the compensating differentials for fatal injury risks are larger for union workers than those of their nonunion counterparts.

Working in Family Firms: Paid Less but More Secure? Evidence from French Matched Employer-Employee Data

The authors study compensation packages in family-owned and nonfamily-owned firms. Using French matched employer-employee data, they first show that family firms pay on average lower wages. Part of this wage gap is attributable to low-wage workers sorting into family firms and high-wage workers sorting into nonfamily firms; however, they also find evidence that company wage policies differ according to ownership status, so that the same worker is paid differently under family and nonfamily firm ownership. In addition, family firms are characterized by lower job insecurity, as measured by lower dismissal rates. Family firms also appear to rely less on dismissals, and more on hiring reductions, than do nonfamily firms when they downsize. The authors show that compensating wage differentials account for a substantial part of the inverse relationship between the family/nonfamily gaps in wages and job security.

A Model of Worker Investment in Safety and its Effects on Accidents and Wages

In this paper, we develop a theoretical model of worker investment in safety. Standard theory assumes that injury risk is exogenous. It predicts that riskier jobs are associated with higher wages. In contrast, in our model, workers make individual safety investments that reduce the risk of injury. This results in a negative association between individual injury risk and wages. We test the model's predictions using obesity as a proxy for worker disinvestments in human capital and safety. In line with our model predictions, we find a significant positive compensating wage differential (CWD) for nonfatal risk at the occupational level. At the same time, however, there exists an underlying significant negative association between individual accident risk and wages, but only in high risk occupations. The latter relationship may downward bias or mask CWD estimates.

Workers’ risk underestimation and occupational health and safety regulation

The standard treatment of occupational risk in the labour market is conducted in terms of the theory of compensating wage differentials, the basic characteristic of which is that workers can fully estimate actual occupational risks. However, research in cognitive psychology, and recent advances in economic psychology, suggest that individuals consistently underestimate risks associated with accidents. In this paper, we discuss the case when the workers systematically underestimate job risks. After presenting the standard treatment of occupational risks, and of health and safety at work regulation, we then proceed to incorporate the idea of job risk underestimation. The paper discusses the types and impact of regulation on health and safety effort in a simple framework in which workers’ beliefs concerning accident risks also play a role. The paper shows that a particular type of regulatory intervention is necessary for the risk underestimating workers not to suffer a welfare loss.

Teaching Economics Using Historical Novels: Jonathan Harr's The Lost Painting

Undergraduate students are often interested in and benefit greatly from applications of economic principles. Historical novels drawn from real-world situations can engage students with economic concepts in new ways and provide a useful tool to help enhance instruction. In this article, the authors discuss the use of historical novels generally in microeconomics, and examine The Lost Painting, a historical novel by Jonathan Harr (2005), in detail. Topics illustrated in the novel include scarcity, opportunity cost, cost-benefit analysis, tax avoidance, labor market specialization, compensating wage differentials, competition and market structure, pricing, income, and government regulation. The authors include an in-depth description of how to incorporate a historical novel into a microeconomics class and provide some evaluation strategies.

On the Benefits of Working in One’s Own Family’s Firm

Although they represent a sizable occupational group, little is known about family employees. Using utility theory and the theory of compensating wage differentials, we hypothesize that family employees have higher levels of job satisfaction and lower wages relative to regular employees. We present several regressions based on a large cross-country panel dataset that support our hypotheses, and we discuss our study’s implications for research on family businesses and the labor market.

The Value of a Statistical Life: Evidence from Panel Data

Abstract We address long-standing concerns in the literature on compensating wage differentials: the econometric properties of the estimated value of statistical life (VSL) and the wide range of such estimates. We confront prominent econometric issues using panel data, a more accurate fatality risk measure, and systematic application of panel data estimators. Controlling for measurement error, endogeneity, latent individual heterogeneity possibly correlated with regressors, state dependence, and sample composition yields VSL estimates of $4 million to $10 million. The comparatively narrow range clarifies the cost-effectiveness of regulatory decisions. Most important econometrically is controlling for latent heterogeneity; less important is how one does it.

Compensating Wage Differentials in Stable Job Matching Equilibrium

Abstract This paper studies implicit pricing of non-wage job characteristics in the labor market using a two-sided matching model. It departs from the previous literature by allowing worker heterogeneity in productivity, which gives rise to a double transaction problem in a hedonic model. Deriving sufficient conditions under which assortative matching is the unique stable job-worker matching, we show that observed wage differentials between jobs reflect not only compensating wage differentials, but also worker productivity gaps between the jobs. We find that the job-worker matching pattern determines the extent to which compensating wage differentials are confounded with the worker productivity gap effect.

The Executive Turnover Risk Premium

We establish that CEOs of companies experiencing volatile industry conditions are more likely to be dismissed. At the same time, industry risk is, accounting for various other factors, unlikely to be associated with CEO compensation other than through dismissal risk. Using this identification strategy, we document that CEO turnover risk is significantly positively associated with compensation. This finding is important because job-risk compensating wage differentials arise naturally in competitive labor markets. By contrast, the evidence rejects an entrenchment model according to which powerful CEOs have lower job risk and at the same time secure higher compensation.

Immigrants in Risky Occupations

This chapter reviews the economics literature on immigrant-native differentials in occupational risk. It begins by briefly explaining the theory of compensating wage differentials. It then provides a more detailed discussion of the empirical evidence on the subject, which reaches several conclusions. First, immigrants are overrepresented in occupations and industries with higher injury and fatality rates. Second, immigrants have higher work-related injury and fatality rates in some advanced economies, but not all. Finally, most, but not all, immigrants appear to earn risk premiums similar to natives for working in risky jobs. The chapter closes with a discussion of areas where additional research is needed.

Schooling is Associated not only with Long-run Wages, but also with Wage Risks and Disability Risks: The Pakistani Experience.

Many studies document significantly positive associations between schooling attainment and wages in developing countries. But when individuals enter occupations subsequent to completing their schooling, they not only face an expected work-life path of wages, but a number of other occupational characteristics, including wage risks and disability risks, for which there may be compensating wage differentials. This study examines the relations between schooling on one hand and mean wages and these two types of risks on the other hand, based on 77,685 individuals in the labour force as recorded in six Labour Force Surveys of Pakistan. The results suggest that schooling is positively associated with mean total wages and wage rates, but has different associations with these two types of risks: Disability risks decline as schooling increases but wage risks, and even more, wage rate risks increase as schooling increases. The schooling-wage risks relation, but not the schooling-disability risks relation, is consistent with there being compensating differentials. JEL classification: J31, J28, O53 Keywords: Wages, Risks, Labour Markets, Job Disabilities, Compensating Differentials, Developing Country, Schooling

The Effect of Local Area Unemployment on Compensating Wage Differentials for Injury Risk

Compensating wage differential (CWD) theory assumes that workers can always find a job without undesired characteristics, which forces firms with disamenities to pay a CWD. However, a simple theoretical variation of standard CWD theory shows that if there is a probability of job loss due to involuntary unemployment, the CWD is lower. When this probability is proxied by local unemployment rates, we find a downward bias in typical estimated CWDs using cross‐sectional data that span many local labor markets. Estimates from the Current Population Survey data show that the bias can be quite large, which in turn impacts the implicit value of injury estimates.

Teaching Economics Using Historical Novels: Jonathan Harr’s the Lost Painting: The Quest for a Caravaggio Masterpiece

Undergraduate students are often interested in and benefit greatly from applications of economic principles. Although popular historical novels do not provide modern examples or business applications, they do draw from historical situations that can help engage students in economic concepts and provide a useful tool to help enhance the instruction of economics. In this paper, we discuss historical novels generally, as well as the specifics of how The Lost Painting, a historical novel by Jonathan Harr, could be used to serve this purpose. Topics illustrated in the novel include scarcity, opportunity cost, cost-benefit analysis, tax avoidance, labor market specialization, compensating wage differentials, competition and market structure, pricing, income, and government regulation. We also provide a detailed discussion about how some of these topics are discussed in the novel and how such a novel can be used in microeconomics instruction.

THE ECONOMICS OF HEALTH AND SAFETY AT WORK: AN INTERDICIPLINARY REVIEW OF THE THEORY AND POLICY

AbstractThis paper engages in an interdisciplinary survey of the current state of knowledge related to the theory, determinants and consequences of occupational safety and health (OSH). It first describes the fundamental theoretical construct of compensating wage differentials, which is used by economists to understand the optimal provision of OSH in a perfectly competitive labour market. The plethora of incentives faced by workers and firms in job and insurance markets that determine the ultimate level of OSH are discussed in detail. The extensive empirical evidence from the hedonic wage and stated choice approaches used to assess the value of OSH is reviewed. The causes of inefficiency and inequity in the market for OSH, such as externalities, moral hazard in compensation insurance, systematic biases in individual risk perception/well‐being and labour market segregation are subsequently examined. The implications of government intervention and regulation for tackling the aforementioned inefficiencies in OSH are then considered. Finally, the survey identifies areas of future research interests and suggests indicators and priorities for policy initiatives that can improve the health and safety of workers in modern job markets.

The Market for Mules: Risk and Compensation of Cross-Border Drug Couriers

This paper uses a unique dataset collected directly from the probable cause narratives filed by federal agents in arrests of individuals caught smuggling drugs though the U.S.-Mexico border to shed light on the cross-border smuggling of drugs from Mexico into the United States. In addition to describing the characteristics of the loads being smuggled into the U.S., we analyze the pay apprehended mules report for attempting to carry their loads across the border to determine whether market forces create a wage premium for differential sentencing risk. Our results reveal that while there is a good deal of unexplained variation in compensation, mules generally appear to be paid compensating wage differentials for loads that carry a higher sentencing risk if detected and for loads that carry an arguably higher likelihood of detection. Our data also reveal that compensation does not appear to be strongly tied to other characteristics of the mule such as gender or citizenship.

Schooling is Associated Not Only with Long-Run Wages, but Also with Wage Risks and Disability Risks: The Pakistani Experience

Many studies document significantly positive associations between schooling attainment and wages in developing countries. But when individuals enter occupations subsequent to completing their schooling, they not only face an expected work-life path of wages, but a number of other occupational characteristics, including wage risks and disability risks, for which there may be compensating wage differentials. This study examines the relations between schooling on one hand and mean wages and these two types of risks on the other hand, based on 77,685 individuals from the wage-earning population as recorded in six Labor Force Surveys of Pakistan. The results suggest that schooling is positively associated with mean total wages and wage rates, but has different associations with these two types of risks: Disability risks decline as schooling increases but wage risks, and even more, wage rate risks increase as schooling increases. The schooling-wage risks relation, but not the schooling-disability risks relation, is consistent with there being compensating differentials.

Foreign ownership, human capital, and the structure of wages in Japan

We examine the differences in the structure of wages between domestic and foreign-owned establishments in Japan. We use high-quality datasets from the Japanese government and construct a large employer–employee matched database consisting of 1 million workers in 1998. Our results confirm that foreign-owned establishments in Japan pay higher wages. We estimate that one percentage increase in foreign-ownership share of equity raises wages by 0.3%. We surmise that this foreign-ownership wage premium can be explained, at least in part, by compensating wage differentials. Workers in foreign-owned establishments are not protected by lifetime employment. They receive higher compensation for being exposed to higher risk and forfeiting their employment security. We also find that in foreign-owned establishments, wages are determined more by general skills, and less by firm-specific skills. These effects become more pronounced among establishments with a higher share of foreign ownership. The gender wage gap is considerably smaller among foreign establishments. Given the lack of long-term prospects for women in the Japanese labor market, foreign-owned establishments may be one source of ‘brain drain’ for highly skilled women there.

Beschäftigung zwischen Mobilität und Stabilität: Empirische Befunde und wirtschaftspolitische Folgerungen

The objective of this paper is to present a short survey of our new research results to mobility and stability of employment on a micro level. This area of conflict is analyzed from an individual and a firm’s perspective, taking institutional issues into account. More than previous studies, we investigate interactions between individual and firm side issues. The results can be assigned to four subsections. First, individual, firm and macroeconomic determinants of employment stability are identified. Second, the relevance of wages and job satisfaction for job changes is investigated. In addition to other findings, the results show for Germany that high job stability and high wages go hand in hand. There exist also unobserved determinants which operate as compensating wage differentials. Third, the impact of institutions on job mobility is analysed. The outcome demonstrates that employment in firms with a collective agreement is more stable than in other firms, while company level pacts are not very successful in stabilizing employment at least in the medium term. Fourth, the effects of wage subsidies on wages and employment duration are investigated. The analysis shows that subsidised workers stay significantly longer at their first employer than similar unsubsidised workers, while entry wages do not differ significantly between both groups.

Contract Length and Salaries Compensating Wage Differentials in Major League Baseball

This study investigates the relationship between free agent salaries and contract length in Major League Baseball (MLB) to examine whether players trade-off returns to performance for additional job security. This study is the first to conduct a comprehensive, multiperiod study of salary determination for all MLB position players who were free agents and signed contracts between 1984-1994 and 2003-2006. The authors use the same technique and variables in all models so that comparisons across time are possible. The empirical results of this study indicate that free agent position players appear willing to trade monetary returns to performance for the security of a longer guaranteed contract. The results are not sensitive to the definition of salary used but are sensitive to the productivity measure employed. The results are least compelling for 1990-1994, a result that is different from the finding of Krautmann and Oppenheimer.