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Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications

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  • Kurt Lavetti

Abstract

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.

Suggested Citation

  • Kurt Lavetti, 2023. "Compensating Wage Differentials in Labor Markets: Empirical Challenges and Applications," Journal of Economic Perspectives, American Economic Association, vol. 37(3), pages 189-212, Summer.
    • Handle: RePEc:aea:jecper:v:37:y:2023:i:3:p:189-212
    DOI: 10.1257/jep.37.3.189
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    Citations

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    Cited by:

    1. Sabrina Wulff Pabilonia & Victoria Vernon, 2025. "Remote work, wages, and hours worked in the United States," Journal of Population Economics, Springer;European Society for Population Economics, vol. 38(1), pages 1-49, March.
    2. Katherine Lim & Mike Zabek, 2024. "What makes a job better? Survey evidence from job changers," Finance and Economics Discussion Series 2024-004, Board of Governors of the Federal Reserve System (U.S.).
    3. Gustavo Canavire-Bacarreza & Ronald A. Cueva & María E. Dávalos, 2024. "Beyond the Usual: Understanding the Multidimensional Nature of Job Quality in Bolivia’s Labor Market," Journal of Labor Research, Springer, vol. 45(4), pages 499-548, December.
    4. Arold, B. W. & Ash, E. & MacLeod, W. B. & Naidu, S., 2025. "The Value of Worker Rights in Collective Bargaining," Cambridge Working Papers in Economics 2517, Faculty of Economics, University of Cambridge.
    5. Hongmei Ma & Wanpeng Lei, 2025. "Compensating teachers serving rural schools: evidence from a developing region in southern China," Palgrave Communications, Palgrave Macmillan, vol. 12(1), pages 1-15, December.
    6. Bíró, A.; & Elek, P.;, 2024. "Firm Quality and Health Maintenance," Health, Econometrics and Data Group (HEDG) Working Papers 24/13, HEDG, c/o Department of Economics, University of York.
    7. Corblet, Pauline & Dupuy, Arnaud, 2024. "Modelling Monospony on the Labor Market with Separable Matching Models," IZA Discussion Papers 17563, Institute of Labor Economics (IZA).
    8. Thimo De Schouwer & Iris Kesternich, 2024. "Work Meaning and the Flexibility Puzzle," CESifo Working Paper Series 11300, CESifo.
    9. Cindy Biesenbeek & Maikel Volkerink, 2023. "The Price of Flexible Jobs: Wage Differentials between Permanent and Flexible Jobs in the Netherlands," De Economist, Springer, vol. 171(4), pages 367-401, December.
    10. Markus Nagler & Johannes Rincke & Erwin Winkler, 2024. "Working from home, commuting, and gender," Journal of Population Economics, Springer;European Society for Population Economics, vol. 37(3), pages 1-23, September.
    11. Kahane, Leo H., 2024. "Compensating wage differentials: Evidence from the National Hockey League," Economics Letters, Elsevier, vol. 241(C).
    12. Anikó Bíró & Péter Elek, 2024. "Firm quality and health maintenance," IFS Working Papers W24/58, Institute for Fiscal Studies.
    13. Arash Nekoei & Jósef Sigurdsson & Dominik Wehr, 2024. "The Economic Burden of Burnout," CESifo Working Paper Series 11128, CESifo.
    14. Benjamin W. Arold & Elliott Ash & W. Bentley MacLeod & Suresh Naidu, 2025. "The Value of Worker Rights in Collective Bargaining," CESifo Working Paper Series 11766, CESifo.
    15. Sam Desiere & Christian Walker, 2023. "The Shift Premium: Evidence From A Discrete Choice Experiment," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1074, Ghent University, Faculty of Economics and Business Administration.

    More about this item

    JEL classification:

    • J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J82 - Labor and Demographic Economics - - Labor Standards - - - Labor Force Composition

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