Compensating Differentials in Experimental Labor Markets

23 Pages Posted: 14 Feb 2015

See all articles by Jeffrey P. Carpenter

Jeffrey P. Carpenter

Middlebury College - Department of Economics; IZA Institute of Labor Economics

Peter Hans Matthews

Middlebury College - Department of Economics

Andrea Robbett

Middlebury College - Department of Economics

Abstract

The theory of compensating differentials has proven difficult to test with observational data: the consequences of selection, unobserved firm and worker characteristics, and the broader macroeconomic environment complicate most analyses. Instead, we construct experimental, real-effort labor markets and offer an evaluation of the theory in a controlled setting. We study both the wage differentials that evolve between firms with varying degrees of disamenity and how these differentials are affected by worker mobility and therefore selection. Consistent with the theory, we find that riskier firms must pay significantly higher wages to attract workers. Further, when workers are mobile, they sort into firms according to their attitudes towards risk and, as a result, the compensating differential shrinks. Last, we are also able to mimic the biases associated with observational studies.

Keywords: compensating differential, sorting, experiment, real effort, risk aversion, ambiguity aversion, loss aversion

JEL Classification: J31, D01, C92

Suggested Citation

Carpenter, Jeffrey P. and Matthews, Peter Hans and Robbett, Andrea, Compensating Differentials in Experimental Labor Markets. IZA Discussion Paper No. 8820. Available at SSRN: https://ssrn.com/abstract=2564953

Jeffrey P. Carpenter (Contact Author)

Middlebury College - Department of Economics ( email )

Munroe Hall
Middlebury, VT 05753
United States
802-443-3241 (Phone)
802-443-2084 (Fax)

HOME PAGE: http://community.middlebury.edu/~jcarpent/index.ht

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Peter Hans Matthews

Middlebury College - Department of Economics ( email )

Munroe Hall
Middlebury, VT 05753
United States
802 443-5591 (Phone)
802 443-2084 (Fax)

Andrea Robbett

Middlebury College - Department of Economics ( email )

Warner Hall
Middlebury, VT 05753
United States

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