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Compensating Wage Differentials in Stable Job Matching Equilibrium

  • Seungjin Han
  • Shintaro Yamaguchi

This paper studies implicit pricing of non-wage job characteristics in the labour market using a two-sided matching model. It departs from the previous literature by allowing worker heterogeneity in productivity, which gives rise to a double transaction problem in a hedonic model. Deriving sufficient conditions under which assortative matching is the unique stable job-worker matching, we show that observed wage differentials between jobs reflect not only compensating wage differentials, but also worker productivity gaps between the jobs. We find that the job-worker matching pattern determines the extent to which compensating wage differentials are confounded with the worker productivity gap effect.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2012-01.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2012-01.

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Length: 25 pages
Date of creation: Jan 2012
Date of revision: Feb 2013
Handle: RePEc:mcm:deptwp:2012-01
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  1. Ekeland, Ivar & Heckman, James J. & Nesheim, Lars, 2003. "Identification and Estimation of Hedonic Models," IZA Discussion Papers 853, Institute for the Study of Labor (IZA).
  2. Patrick Legros & Andrew F. Newman, 2003. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Economics Working Papers 0030, Institute for Advanced Study, School of Social Science.
  3. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  4. Duncan, Greg J & Holmlund, Bertil, 1983. "Was Adam Smith Right after All? Another Test of the Theory of Compensating Wage Differentials," Journal of Labor Economics, University of Chicago Press, vol. 1(4), pages 366-79, October.
  5. Teulings, Coen N, 1995. "The Wage Distribution in a Model of the Assignment of Skills to Jobs," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 280-315, April.
  6. Donald Boyd & Hamilton Lankford & Susanna Loeb & James Wyckoff, 2003. "Analyzing the Determinants of the Matching Public School Teachers to Jobs: Estimating Compensating Differentials in Imperfect Labor Markets," NBER Working Papers 9878, National Bureau of Economic Research, Inc.
  7. Sattinger, Michael, 1977. "Compensating wage differences," Journal of Economic Theory, Elsevier, vol. 16(2), pages 496-503, December.
  8. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  9. Pierre-Andre Chiappori & Robert McCann & Lars Nesheim, 2007. "Hedonic price equilibria, stable matching, and optimal transport: equivalence, topology, and uniqueness," CeMMAP working papers CWP23/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02.
  11. Brown, Charles, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 113-34, February.
  12. Hwang, Hae-shin & Reed, W Robert & Hubbard, Carlton, 1992. "Compensating Wage Differentials and Unobserved Productivity," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 835-58, August.
  13. Yoshitsugu Kanemoto, 1985. "Hedonic Prices and the Benefits of Public Projects," Working Papers 617, Queen's University, Department of Economics.
  14. Lucas, Robert E B, 1977. "Hedonic Wage Equations and Psychic Wages in the Returns to Schooling," American Economic Review, American Economic Association, vol. 67(4), pages 549-58, September.
  15. Kevin Lang & Sumon Majumdar, 2004. "The Pricing Of Job Characteristics When Markets Do Not Clear: Theory And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1111-1128, November.
  16. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  17. Kevin Lang & Sumon Majumdar, 2003. "The Pricing of Job Characteristics When Markets Do Not Clear: Theory and Implications," NBER Working Papers 9911, National Bureau of Economic Research, Inc.
  18. Ivar Ekeland, 2010. "Existence, uniqueness and efficiency of equilibrium in hedonic markets with multidimensional types," Economic Theory, Springer, vol. 42(2), pages 275-315, February.
  19. Hwang, Hae-shin & Mortensen, Dale T & Reed, W Robert, 1998. "Hedonic Wages and Labor Market Search," Journal of Labor Economics, University of Chicago Press, vol. 16(4), pages 815-47, October.
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