COMPENSATING DIFFERENTIALS

When a worker is deciding whether to take a job, the wage is only one of many job attributes that the worker takes into account. Some jobs are easy, fun, and safe; others are hard, dull, and dangerous. The better the job as gauged by these nonmonetary characteristics, the more people there are who are willing to do the job at any given wage.

For example, imagine you are looking for a summer job in a local beach community. Two kinds of jobs are available. You can take a job as a beach-badge checker, or you can take a job as a garbage collector. _ The beach-badge checkers take leisurely strolls along the beach during the day and check to make sure the tourists have bought the required beach permits. The garbage collectors wake up before dawn to drive dirty, noisy trucks around town to pick up garbage. Which job would you want? Most people would prefer the beach job if the wages were the same. To induce people to become garbage collectors, the town has to offer higher wages to garbage collectors than beach-badge crackers.

Economists use the term compensating differential to refer to a difference in wages that arises from nonmonetary characteristics of different jobs. Compensating differentials ere prevalent in the economy. Here are some examples:

• Coal miners are paid more than other workers with similar levels of education. Their higher wage compensates them for the dirty and dangerous nature of coal mining, as well as the long-term health problems that coal miners experience.

• Workers who work the night shift at factories are paid more than similar workers who work the day shift. The higher wage compensates them for having to work at night and sleep during the day, a lifestyle that most people find undesirable.

• Professors are paid less than lawyers and doctors, who have similar amounts of education. Professors’ lower wages compensate them for the great intellectual and personal satisfaction that their jobs offer. (Indeed, teaching economics is so much fun that it is surprising that economics professors get paid anything at all)

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