The pervasive absence of compensating differentials

Stéphane Bonhomme and Gregory Jolivet

Journal of Applied Econometrics, 2009, vol. 24, issue 5, 763-795

Abstract: We study the relation between individual preferences for job amenities (e.g., type of work, job security) and compensating wage differentials in cross-section. To this end, we estimate a partial equilibrium job search model on panel data from eight European countries. There are five non-wage job characteristics and two sources of job-to-job mobility: on-the-job search and reallocation shocks. We also allow for two types of unobserved heterogeneity. We find strong preferences for amenities, especially job security, yet, these preferences do not translate into significant wage differentials in cross-section. Counterfactual experiments show that one would need extremely low levels of search frictions for compensating differentials to arise. Lastly, a similar exercise on the distribution of job change outcomes reveals the role of constrained job-to-job mobility in the absence of compensating wage differentials. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2009
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Working Paper: The Pervasive Absence of Compensating Differentials (2005)
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DOI: 10.1002/jae.1074

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