Compensating Wage Differentials and Unobserved Productivity
It is well known that the inability to observe workers' full labor market productivity can bias estimates of compensating wage differentials. This paper attempts to determine how serious this bias is likely to be. It adopts a stochastic framework or workers' tastes over job attributes and models their equilibrium wage-job attribute choices. Workers' productivity is assumed to consist of observed and unobserved components. Applying the standard estimation methodology, the authors find that the degree of bias can be surprisingly large. On the basis of their analysis, they conclude that contemporary labor market studies are likely to severely underestimate workers' willingness to pay for job attributes. Copyright 1992 by University of Chicago Press.
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