Compensating Differentials

Wage premiums that make up for unpleasant, dangerous or risky features of a job, an idea that goes back to Adam Smith.

Overview

In The Wealth of Nations, Smith argued that wages vary with the ease or hardship, cleanliness, safety and constancy of employment. Modern labor economists test this by estimating the extra pay workers receive for risk of injury or death, which feeds into the value of a statistical life used in regulation. Night shifts, remote postings such as offshore rigs, and seasonal work often carry premiums. The reverse also holds: jobs with prestige, flexibility or meaning can attract workers at lower pay.