The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Compensating Differentials

  • Matthew E. Kahn
Reference work entry


Compensating differentials represent a wage premium for unpleasant aspects of a job. Jobs differ along several dimensions. Some jobs offer generous health insurance benefits. Others entail long hours or may expose workers to physical risks. Some are available only in polluted cities. In equilibrium, labour markets accommodate diversity by establishing wages that tend to make different jobs relatively close substitutes at the margin. Using hedonic wage regression techniques, researchers have estimated the equilibrium implicit market price that workers pay, through lower wages, for working in a more pleasant setting. This technique is widely used by labour and environmental economists.


Compensating differentials Hedonic wage function Labour economics Rosen, S. Superstars, economics of Unobserved skill Urban economics Urban environment and quality of life Wage heterogeneity, sources of Wage premium Worker heterogeneity 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Matthew E. Kahn
    • 1
  1. 1.