Compensating Differentials

The latest section of our Principles of Economics course at MRU is up today and it covers price discrimination and labor markets.

In this video, The Tradeoff Between Fun and Wages, we introduce the idea of compensating differentials in wages, an idea that goes back to Adam Smith.

Sharp readers will notice a homage near the beginning in what might otherwise appear to be an odd scene setting.


The moon is an odd setting. But I am not that sharp a reader to see why. Did astronauts got paid little? Is it fun to go to the moon?

The Moon is a Harsh Mistress!

Heh, I was just going to comment that I loved the moon picture with TANSTAAFL.

Soon to be a high budget motion picture:

And if the Starship Trooper's adaptation is any indication, "The Moon Is a Harsh Mistres"s will be the story about a successful Communist revolution on the Moon.

See here
if you are curious about the allusion.

I can't remember his name, but there was a contrarian economist I remember commenting at Gelman's & EconoSpeak who argued that there's no evidence for compensating differentials based on occupational safety. Instead wages appear to be governed by industry norms, so that safe occupations in a high wage industry still receive that higher wage.

Lawyers face all kinds of risk, as do tenured faculty members.

Including the occasional tear gassing in the classroom, though that may have been close to a unique event, and not really reflecting an occupational hazard.

Grade A geekery. Congratulations.

Well, I understand the theory, but if this was true in practice, then being CEO of a Fortune 500 company must be equivalent to painting a bullseye on your back and parading in front of a bunch of resurrected Red Brigade terrorists!

Remember: _All other things being equal._ The skill set for CEO verses the skill set for a lot of other jobs that don't pay millions of dollars a year are not the same. But, you might look at the wages for CEOs with good job security (say, at a firm that hires internally and has a tradition of keeping CEOs until retirement) and CEOs with bad job security and expect to find the latter get paid higher than the former even if everything else (CEO experience, company size, etc) is equal.

All other things being equal depends on how you define the relevant market. Does the market for CEOs include small business owners, or not? Does it include all big companies, or just those big companies in the same field? If the market is larger, as I posit, then indeed CEOs of Fortune 500 are either grossly overpaid compared to their mom-and-pop proprietor equivalents, or, they are assuming massive risk from some external factor, every time they go to work, as I joked.

Is the sewer full of rats supposed to refer to this comment section?

I love you guys!

Best self-recommending satire site on the web.

Does the phrase "holding all else constant" mean anything to anyone? Also, different people have different preferences for risk, and we all think different things are "fun" so this dilutes the ability to measure the differentials. A few people might have a low aversion to risk so those people gravitate into risky professions. So this theory not only informs us of wages, but the demographics of different professions. And it is not meant to explain everything.

Having worked at Walt Disney World, in the park having a lot of fun, I can tell you that there's something to a fun job. Now I sit at a desk....

This is a good example of an oversimplification of the economy so far from how the world works that it does not even bear actual repeating. Really the main point of the real world is that all other things being equal is the exception not the rule.

How do the economics work when the fun is free for the employer to provide?

Most of Google's perks (with the exception of buses and food) are of trivial cost free for Google!

But a lot of companies don't provide the perks because they're not innovative enough to care.

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