Overview
compensating differentials
Quick Reference
Compensating wage differentials are higher wages (than can seemingly be explained by reference to skill level or human capital) that are paid to workers who perform jobs that have particular hazards or other unpleasant features associated with them. The phenomenon has long been identified by economists and indeed was noted by Adam Smith in The Wealth of Nations: ‘…the wages of labour vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness, of the employment…. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours, as a collier, who is only a labourer, does in eight. His work is not quite so dirty, is less dangerous, and is carried on in day-light, and above ground.’ The higher wages paid to workers in hazardous jobs, where there is a risk of accident and injury, has been a particular focus of economic research but there are many types of compensating differential. Payment of a London allowance can be understood in these terms as can higher payments for those in insecure or fixed-term jobs or those who work unsocial hours. Relatively high wages paid to those performing sex work, might provide another example.
