compensating differentials

Matthew E. Kahn
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Compensating differentials represent a wage premium for unpleasant aspects of a job. Jobs differ along several dimensions. Some jobs offer generous health insurance benefits. Others entail long hours or may expose workers to physical risks. Some are available only in polluted cities. In equilibrium, labour markets accommodate diversity by establishing wages that tend to make different jobs relatively close substitutes at the margin. Using hedonic wage regression techniques, researchers have estimated the equilibrium implicit market price that workers pay, through lower wages, for working in a more pleasant setting. This technique is widely used by labour and environmental economists.
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How to cite this article

Kahn, Matthew E. "compensating differentials." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 13 December 2017 <> doi:10.1057/9780230226203.0276

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