Compensating Wage Differentials in Stable Job Matching Equilibrium
26 Pages Posted: 30 Jan 2012 Last revised: 18 Mar 2015
Date Written: July 17, 2013
Abstract This paper studies implicit pricing of non-wage job characteristics in the labor market using a two-sided matching model. It departs from the previous literature by allowing worker heterogeneity in productivity, which gives rise to a double transaction problem in a hedonic model. Deriving sufficient conditions under which assortative matching is the unique stable job-worker matching, we show that observed wage differentials between jobs reflect not only compensating wage differentials, but also worker productivity gaps between the jobs. We find that the job-worker matching pattern determines the extent to which compensating wage differentials are confounded with the worker productivity gap effect.
Keywords: hedonic model, heterogeneity, two-sided matching, matching pattern, wage differential, equalizing difference, worker productivity
JEL Classification: C78, J31
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