Estimating Compensating Wage Differentials:Results from the US Displaced Worker Survey

While the model of competitive labor market predicts wage pre-miums in unpleasant jobs so that marginal workers are induced to work in those workplaces, previous empirical studies of com-pensating wage differentials have not provided a consistent con-firmation of the theory. Unobserved individual characteristics are assumed to play important roles in biasing estimated coefficients of compensating differentials. However, even those empirical studies using panel data do not seem to produce the expected relation-ship between job characteristics and wages. Using a large sample of the US Displaced Worker Survey (DWS), this paper engages in another attempt to test the existence of compensating wage differ-entials. The paper shows that cross-section estimates of compen-sating differentials change substantially in the expected direction in differenced displaced-worker data. To describe why using a sample of displaced workers produces more expected results than other studies, the author discusses the role of self-selection