12.2 Labor Supply: What Workers Want
So far, we’ve seen how the demand for workers with different attributes yields different wages. Let’s now turn to labor supply, which means focusing on the question of what workers want. And so we’ll turn our attention from the different attributes of workers, to the different attributes of jobs.
Compensating Differentials
Have you ever thought of becoming a cosmetologist? If so, I’ve got a great deal for you. There’s a job that requires a similar amount of training, where you’re also paid to make people look good, while also earning a lot more money. And your customers will never be rude to you, nor will they squirm while you work on them. The job? Mortician. Interested? Probably not. I mean, imagine the awkward first dates you’ll experience as you describe what you do all day.
Because morticians and cosmetologists require similar training—both require a vocational degree—we can infer that the differences in their pay aren’t due to differences in their human capital. Instead, it’s because it is unpleasant to spend your days looking after corpses. After all, why would you—or anyone—accept such an unpleasant job unless you were paid a bit more? The extra wage boost that you would earn as a mortician is called a compensating differential—a difference in wages required to offset the undesirable (or desirable) aspects of the job. It’s compensating, because it compensates you for the attributes of the job. And it’s a differential, because it leads people with similar human capital to earn different wages.
Which job would you rather have?
Jobs with undesirable attributes pay more.
The worse the characteristics of a job, the higher the wage required to induce you—or other workers—into that occupation. There are lots of attributes that may make a job undesirable, and in each case, they lead to higher wages. For instance, construction jobs involve back-breaking work in the sun. Real estate agents face a lot of uncertainty, because they don’t know how many homes they’ll sell, and hence how much commission they will earn. Investment bankers and corporate lawyers often work upward of 80 hours per week. Management consultants often travel every week. Chefs typically work nights and most weekends, leaving little time for a social or family life. Miners literally risk their lives every day when they go to work.
These adverse attributes reduce labor supply, and as Figure 2 shows, this leads to higher pay for these jobs. Many people simply wouldn’t be willing to supply their labor at lower wages. For example, nurses who work nights earn more than those who work during the day. Why? Because working nights can wreak havoc on your family life and your physical health. If day shifts and night shifts paid the same, lots of workers would be willing to work during the day, while few would volunteer for the night shift. Instead, hospitals pay higher wages for night shifts to induce enough nurses to be willing to work at night.
Figure 2 | Compensating Differentials
Jobs with desirable attributes pay less.
On the flip side, some jobs come with splendid side benefits. Teachers take most of the summer off. Veterinarians play with puppies. Journalists get satisfaction from uncovering the truth. Preachers feel like they are doing God’s work. And so people are willing to accept these jobs, despite that fact that they’re getting paid less than they might earn in another job. As a result, wages in these desirable occupations tend to be somewhat lower to offset these nonfinancial benefits. That is, in some jobs compensating differentials lead to lower wages, as workers essentially “pay” to enjoy the pleasant aspects of their work.
Compensating differentials depend on the preferences of other workers.
Whether you’re offered a compensating differential or not depends on how the market as a whole—that is, other people—view a job attribute, not how you view it. That means that if you hate dogs, don’t expect to be paid a lot to work as a dog walker, because there are plenty of dog lovers who are thrilled to work with dogs, even if the pay is lousy.
This insight is the interdependence principle in action. It also provides useful advice: Think about your tastes compared to those of other workers. You’ll find a good match when you’ve found a job whose positive attributes are even more important to you than they are to others. Or look for a job whose negative attributes don’t bug you as much as they bug others, and you’ll enjoy the extra pay without being so worried about those negatives.
Interpreting the DATA
How much is a life worth?
How much money would I have to pay you to risk your life? You can’t say you’ll never risk it, because you already take a risk of dying every time you ride in a car. So, how much? It’s an important question, because it tells policy makers how much they should spend in trying to reduce these risks. And it’s closely related to compensating differentials.
How much would you need to be paid to take these risks?
One possible answer comes from analyzing how the occupational choices that people make reveal their own willingness to risk their lives. That is, you can compare the compensating differential that workers demand to enter risky industries like mining with that in less risky occupations. Recent research suggests that workers demand somewhere between $6,000 and $10,000 in extra income to compensate for a 0.1 percentage point increase in the probability of a fatal work injury. This means that, taken together, 1,000 workers accept an extra $6 to $10 million, in return for the likelihood that one of them will die. Stated this way, we can say that workers act as if they value one statistical life at $6 to $10 million!
