Job Dispersion and Compensating Wage Differentials
40 Pages Posted: 8 Oct 2014 Last revised: 5 Aug 2023
Date Written: August 4, 2023
Abstract
The empirical literature seeking for evidence of 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 job values, or ``job dispersion.'' 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. The model incorporates three primary mechanisms that challenge the validity of traditional hedonic wage regressions: (1) search frictions, (2) dispersion in the value of job offers, (3) unobserved heterogeneity in worker ability. Estimating simple hedonic wage regressions using simulated data from the model reveals that estimates of the marginal willingness-to-pay (MWP) for non-wage job characteristics are severely attenuated. While worker
heterogeneity and search frictions are important sources of bias, a significant
proportion can only be explained by randomness in job offers.
Keywords: compensating wage differentials, theory of equalizing differences, revealed preference, on-the-job search
JEL Classification: J3, J42, J64
Suggested Citation: Suggested Citation