Job Dispersion and Compensating Wage Differentials

The empirical literature on compensating wage differentials has a mixed history. While there have been some successes, much of this research finds weak support for the theory of equalizing differences. We argue that these negative results can be explained by bias in estimated compensating wage differential regressions. The source of this bias is dispersion in total job values, or “job dispersion.” We begin by using a simple theoretical model to demonstrate how dispersion in wages and non-wage values of jobs can lead to biased hedonic estimates of the marginal-willingness-to-pay (MWP) for non-wage job characteristics. Next, we quantify this bias by estimating a structural on-the-job search model that allows jobs to be differentiated by both wages and jobspecific non-wage utility. Using simulated data from the model, we conduct a detailed analysis of the sources of bias in traditional hedonic wage estimates. Estimates of the MWP for non-wage job characteristics are severely attenuated. While worker heterogeneity and job dynamics are important sources of bias, a significant proportion can only be explained by randomness in job offers.