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Compensating differentials, labor market segmentation, and wage inequality.
Jonathan Daw1, Jessica Halliday Hardie
1Institute of Behavioral Science and Institute for Behavioral Genetics, University of Colorado, Boulder, United States.
Social Science Research
|September 29, 2012
Summary
Workers trade job amenities for wages, impacting labor market success. A new measure shows this amenity match predicts job satisfaction, confirming wage tradeoffs in most labor markets.
Area of Science:
- Labor Economics
- Sociology of Work
- Organizational Psychology
Background:
- Two distinct literatures highlight the significance of non-pecuniary job amenities in the labor market.
- Social psychology suggests workers have preferences for various job amenities.
- The compensating differentials hypothesis posits that wage inequality may overstate utility inequality due to amenity tradeoffs.
Purpose of the Study:
- To develop a novel measure of labor market success based on the alignment of workers' job amenity preferences and outcomes.
- To utilize this subjective success measure to predict job satisfaction.
- To test the hypothesis that wage inequality in the labor force is partly explained by preference-based tradeoffs in job amenities.
Main Methods:
- Construction of a new metric to assess the congruence between workers' desired job amenities and their experienced job amenities.
- Statistical analysis to determine the predictive power of this new measure on workers' job satisfaction.
- Examination of the presence of compensating differentials across different segments of the labor market.
Main Results:
- The newly developed measure of labor market success significantly predicts workers' job satisfaction.
- Evidence supports the existence of compensating differentials related to job amenities in the primary and intermediate labor markets.
- No significant evidence of compensating differentials was found in the secondary labor market.
Conclusions:
- A better match between job amenity preferences and outcomes leads to higher job satisfaction.
- Compensating differentials, where wages adjust for non-pecuniary job attributes, are present in key labor market segments.
- The findings underscore the importance of considering both financial and non-financial job aspects for a comprehensive understanding of labor market dynamics and worker well-being.
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