The Theory of Compensating Wage Differentials Rests on Three Assumptions

Question

Examlex · Accepted Answer

The Answer is The theory of compensating wage differentials predicts that individuals working jobs with poor working conditions earn higher wages than individuals working under more pleasant conditions.This prediction assumes first that workers are utility maximizers (as opposed to income maximizers).A compensating differential could be observed only if it is the case that some people prefer lower paying but more pleasant jobs.The second assumption that the theory relies on is that workers are well informed regarding relevant working conditions.Some undesirable working conditions are obvious,such as night or weekend work,physical stress,lack of autonomy,and so forth.Other poor working conditions may not be at all obvious,such as exposure to a toxic chemical or material that is not as yet recognized as a toxic substance.The third assumption that the theory relies on is that workers are mobile.Workers must have a range of jobs between which they can choose in order to be able to select job characteristics that match their preferences and avoid jobs that do not fit with their preferences.

The Theory of Compensating Wage Differentials Rests on Three Assumptions

Definitions: