Compensating differential

Abstract: The concept of a competitive market is a major tool in the analysis of economists. In the simplest version of a market, resource allocation responds instantly to changes in parameters, leaving no room for frictional unemployment. One response to the unreality of this implication has been to introduce spatially distinct markets, with unemployment as workers move between markets. As modeled by Lucas and Prescott (1974), workers who are not moving are not unemployed. An alternative response is contained in the sizeable fixed price equilibrium literature, where it is assumed that prices do not change to clear markets in the short run. In contrast, the conceptual starting place of this analysis is to drop the idea of a market. Rather than markets being the mechanism by which workers and jobs are brought together, it is assumed that there is a search process which stochastically brings together unemployed workers and vacant jobs pairwise. It is taken as axiomatic that the process takes time and so involves foregone output. It is assumed that a worker and a job brought together by the search process negotiate a wage, with instantaneous negotiation. Thus, the only frictions in the model are in the search process, with wages flexible. Actual search and negotiation processes are complicated and would be difficult to model in detail. Here we make numerous simplifying assumptions to permit explicit solution of equilibrium variables and easy analysis of their efficiency properties. The focus of the analysis is the efficiency of the incentive to enter the labour market. That is, we compare the lifetime expected present discounted value of earnings of a new worker with the social marginal product of that worker. The comparison depends critically on the bargaining solution and on the nature of the search technology. Generally, equilibrium is not efficient because of search externalities. The sources of the externalities are easy to see. The presence of an additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs. The wage negotiation, however, reflects the relative bargaining powers of workers and jobs. Only in special cases will the balance of bargaining powers result in a wage which reflects the balance of search externalities as well as the value of output directly produced. The analysis identifies cases where the incentive for entry is too large or too small. This efficiency analysis complements other efficiency analyses of search intensity, job-quitting, and job-taking (Diamond (1981), Diamond and Maskin (1979, 1981), and Mortensen (1979, 1981)). These latter papers have considered markets with equal numbers of jobs and workers. This paper focuses on the implications of unequal numbers

Abstract: Salary data from a single firm are analyzed in an effort to identify the firm's wage policy. We find that employees are partly shielded against changes in external market conditions; that wage variation within a job level is large both cross-sectionally and for individuals over time, often leading to substantial real wage declines; that wage increases are serially correlated even controlling for observable characteristics; and that promotions and wage growth are strongly related, even though promotion premiums are small relative to the large wage differences between job levels. None of the major theories of wage determination can alone explain the evidence.

Abstract: Since the early 1970s, a number of authors have calculated gender wage differentials between women and men of equal productivity. This meta-study provides a new quantitative review of this vast amount of empirical literature on gender wage differentials as it concerns not only differences in methodology, data, and time periods, but also different countries. We place particular emphasis on a proper consideration of the quality of the underlying study which is done by a weighting with quality indicators. The results show that data restrictions - i.e. the limitation of the analysis to new entrants, never-marrieds, or one narrow occupation only - have the biggest impact on the resulting gender wage gap. Moreover, we are able to show what effect a misspecification of the underlying wage equation - like the frequent use of potential experience - has on the calculated gender wage gap. Over time, raw wage differentials worldwide have fallen substantially; however, most of this decrease is due to better labor market endowments of females.

Abstract: The theory of equalizing differences asserts that workers receive compensating wage premiums when they accept jobs with undesirable nonwage characteristics, holding the worker's characteristics constant. Previous research provides only inconsistent support for the theory, with wrong-signed or insignificant estimates of these wage premiums fairly common. An oft-cited reason for these anomalies is that important characteristics of the worker remain unmeasured, biasing the estimates. In this paper, longitudinal data are used to test this conjecture. Although such data improve the control for worker characteristics, the plausibility of the estimates is not markedly improved. Alternative explanations for these results are considered. "It's indoor work and no heavy lifting." —Senator Robert Dole, explaining why he wanted to be Vice President.