Job Dispersion and Compensating Wage Differentials

The empirical literature seeking evidence of compensating wage differentials has a mixed history. Although there have been some successes, much of this research finds weak support for the theory of equalizing differences. The authors of this article argue that this weak support is the result of bias due to dispersion in total job values, or “job dispersion.” They investigate this bias by estimating a structural on-the-job search model that allows jobs to be differentiated by both wages and job-specific non-wage utility. An on-the-job search model features job dynamics, job offer dispersion, and unobserved heterogeneity in worker ability. Estimating simple hedonic wage regressions using simulated data from the model reveals that estimates of the marginal willingness to pay for non-wage job characteristics are severely attenuated. While worker heterogeneity and job dynamics are important sources of bias, another significant source is job offer dispersion. Even controlling for ability, job dynamics, and their interaction, 44% of the variation in wages remains unexplained.