Talk:Compensating differential

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Above undated message substituted from Template:Dashboard.wikiedu.org assignment by PrimeBOT (talk) 18:12, 16 January 2022 (UTC)

from another article

The following text is from Talk:Compensating_variation#Old_content where another editor claims to have removed it from that article. It more obviously belongs with this article. I paste it here for editors of this article to use.

In economics, the principle of compensating variation says that when two apparently similar things are differently priced by the market, there must be some difference between them that compensates for this price difference. If this were not the case, then there would be an opportunity for arbitrage.

Compensating variation is especially applied to labor markets. For instance, suppose that there are two jobs available which require no special education and thus appeal to mostly the same group of workers, but one pays twice as much. If there were no compensating variation between the two jobs, all workers would go into the higher-paying field, which would drive down wages in that field. Thus, if there is a sustained wage difference, we know that the higher-paying job has some factor that makes it less appealing than the lower-paying job; it may be more dangerous, dirtier, more socially degrading, and so on. The factors that make the difference in wages possible are the compensating variation and the difference in wages itself is called the equalizing difference.

A compensating variation can also be used to explain the difference in wages among different groups of workers. A wage gap may be seen if employers are able to set different prices for labor among different groups. For example, if allowed, employers may value equivalent work by one group less if they tend to quit sooner, forcing the employer to train replacements more often. Furthermore, there may still appear to be an unfair wage gap for seemingly equal labor even when individual employers don't discriminate wages. The principle of compensating variation suggests that there must be some hidden difference in the labor between the groups. For example, the motherhood wage gap can be partially explained as a compensating variation in the preferences of mothers and non-mothers. Family responsibilities creates a compensating variation in work preferences; a mother may be less likely to work long hours or relocate her family to take advantage of the most lucrative jobs available for her skill level.

Compensating variation can also be applied in real estate markets. For instance, two similar houses may have very different costs depending on their proximity to good schools or centers of employment.

In some cases, the price difference between the two goods can be used to measure the value of the compensating variable. For instance, suppose there was a dangerous job and a safe job requiring equal qualifications; the difference in wage between the two could shed light on how much people value their life.

The price difference reflects the preferences of the marginal consumer. For instance, suppose that there was a demand for ten air show pilots, a "dangerous job", and ninety jumbo jet pilots, a "safe job". Suppose also that of the 100 available workers, 9 are indifferent about the danger, 2 require a salary $1000 higher to take a dangerous job, and the other 89 require a salary $100000 higher to take a dangerous job. In this market, the dangerous job will pay $1000 dollars more than the safe job – the preference of the marginal actor determines the difference.

enjoy. PDBailey (talk) 01:33, 5 January 2009 (UTC)

Differential pay for Sundays, holidays, &c.

This article does not address differential pay for working on Sundays, holidays, or evenings, which is (or once was) common in the United States. PlaysInPeoria (talk) 17:03, 23 August 2012 (UTC)

Improving this article

I think this article could be improved in two ways: 1) The sections "Geographical wage differentials" and "Theory" should be distinct. 2) The article emphasizes geographical wage differentials and should therefore include more discussion of compensating wage differentials in general but also with regard to health risks at the job. According to Boraj's labor econ textbook, this is the empirically most unambiguous existing wage differential. --Merkasso (talk) 17:35, 20 June 2017 (UTC)