Two workers of equal skill and equal diligence may earn very different wages, and neither be the victim of any injustice. The coal-hewer earns more than the clerk who could, with training, have hewn coal; the worker on the night shift more than the worker on the day; the trade that is filthy, or dangerous, or held in contempt pays a premium that the clean, safe, respectable trade has no need to offer. This is the doctrine of compensating differences — of equalising differences, as it is also called — and it is among the oldest and most elegant ideas in the whole study of the wage. It holds that the wage is the price not of the worker's skill alone, but of the entire job: its perils and its pleasures, its security and its standing, all of them reckoned in, so that the money part of the reward is set precisely to make up for whatever the rest of the bundle lacks, and the full reward of every employment — money and all the rest together — tends to come out equal, for workers who might have taken any of them. The plate sets out this beautiful theory; and then it must face the awkward circumstance that, in the data, the thing is so very hard to find.
Begin, as the doctrine begins, with Adam Smith. In a celebrated chapter he asked why wages varied so across the different employments, and he laid out five circumstances which, he said, “make up for a small pecuniary gain in some employments, and counterbalance a great one in others.” The first was the agreeableness or disagreeableness of the work itself: the pleasant calling could be had cheap, the loathsome one had to pay for itself, so that — Smith's own example — the public executioner, plying “the most detestable of all employments,” was better paid for the quantity of work done than any common trade, while the honourable professions, sought after for their dignity, were underpaid for their skill. The second was the difficulty and expense of learning the business — the cost of acquiring the skill, which the wage must in time repay, the very seed from which the fourth plate's human capital would grow. The third was the constancy, or inconstancy, of the employment: the mason and bricklayer, thrown idle by every hard frost and every slack season, must earn more in their working days to carry them through the empty ones than the workman whose employment never pauses. The fourth was the trust reposed in the worker — the goldsmith, the physician, the lawyer paid in part for their reliability and the confidence placed in them. And the fifth was the probability of success: the lottery trades, like the law, in which a few who triumph must be rewarded richly enough to draw in the many who are bound to fail — though Smith noted, with his usual dryness, that the overweening conceit most people hold of their own abilities and their own good fortune leads them to undervalue the risk and crowd in too cheaply.
What Smith had seen is one of the most powerful ideas in the subject, and it deserves to be stated at its full strength. The wage, on this view, is not a reward for skill held apart from everything else, but the price of a whole bundle of things, of which money is merely the part that happens to come in money — fixed, by the market, at whatever level is needed to make up for the badness, or claw back the goodness, of all the rest. And in a competitive market — where workers know the conditions of the jobs on offer, and are free to move between them — the differential is not a kindness but a necessity of arithmetic: if the dangerous job did not pay more than the safe one, no one in his senses would take it at the same wage, and the dangerous job would stand unfilled until its wage rose far enough to fill it. The compensating differential is, in this sense, the competitive market's standing promise to the worker in the worst job — the pledge that he will at the least be paid for its badness, that hardship, if it cannot be abolished, will at least be priced. It is worth, in the second plate's sense, carried outward from the skill of the worker to the burden of the work.
The compensating differential is the competitive market's promise to the worker in the worst job: that hardship, if it cannot be abolished, will at least be priced.
And the idea, once formalised, yields one of the most arresting numbers in all of economics. Suppose a class of workers must be paid some extra sum — a thousand dollars a year, let us say — to accept a job that carries one additional chance in ten thousand of killing them. Then that premium reveals, by the plainest division, what those workers implicitly require to be paid against a life: a thousand dollars set against a ten-thousandth of a death is, multiplied out, a value of some ten million dollars. Economists call it the value of a statistical life, and they read it precisely from these compensating differentials, traced with great care by W. Kip Viscusi and others through the wages of hazardous work. It is not the worth of any particular person's life, which is beyond all price; it is the rate at which people, by their own choices in the labour market, trade money against small probabilities of death. And it has become, for better and for worse, the very figure that a government sets against the lives a safety rule would save, to judge whether the rule is worth its cost. The wage quietly paid for danger has become the price the state openly puts upon a life. So much rests on Smith's small observation.
And here the elegant theory runs into a fact that has discomfited it for half a century: the compensating differential is, in the data, remarkably hard to find — and just where one looks for it most confidently, it often turns up with the wrong sign altogether. The dirtiest, most dangerous, most degrading jobs in a modern economy — the slaughterhouse line, the stoop labour of the field, the cleaning of other people's filth — are not, by and large, the best-paid jobs but among the very worst-paid. The theory foretells a premium for badness; the world displays a penalty. The reason is not that Smith was mistaken, but that the world is not the competitive market his theory supposes. The good jobs, it turns out, tend to be good on every dimension at once — well paid and safe and pleasant — and the bad jobs bad on every dimension at once, because workers are sorted among the jobs by something the economist cannot readily see: their ability. The able take the employments that are agreeable and well paid together; the unskilled are left those that are wretched and ill paid together; and this sorting, by an ability that goes unmeasured, drowns in the raw figures the very differential the theory is hunting for — exactly as it drowned the true return to schooling in the fourth plate. To see the differential at all, one must hold ability fixed; and ability is the thing that will not hold still.
But there is a deeper reason the worst jobs so often pay the least, and it leads straight back to the spine of this volume. The compensating differential is the promise of a competitive market — and a promise is kept only on the terms it was made. It requires that the worker know the dangers he is taking on, which the worker in the worst job very often does not; that he be free to leave for a safer job, which the worker held fast by poverty, or by debt, or by the single employer who dominates his town — the monopsony of the eighth plate — very often is not; and that he have the bargaining strength to extract the premium he is owed, which the worker of the first plate, standing alone and hungry, conspicuously has not. Where these conditions hold, the danger is compensated, and the differential shows itself as honest worth. Where they fail — where the worker is kept ignorant, immobile, and weak — the danger is simply borne, unpaid for, and the differential vanishes quietly into the cost the employer did not have to bear. The broken promise of compensating differences is therefore no refutation of Smith's theory, but a measurement of the distance between the competitive market the theory assumes and the powered, frictioned, imperfect market the worker actually lives in. The differential that ought to be paid, and is not, is the worth that power has quietly pocketed.
The differential that ought to be paid, and is not, is the worth that power has quietly pocketed.
And yet the theory is not dead — only exacting. Where the conditions of competition are better satisfied, among workers who have information and choices, the compensating differential reappears, and the modern labour market has made it visible afresh in a coin Smith did not foresee. Workers, it emerges, will readily trade away real wages for the amenities they value: for the freedom to set their own hours, for the option to work from their homes, for a shorter journey to the job, for the safety or the sociability or the meaning of the work — accepting, in careful experiments built to measure it, distinctly lower pay to secure them. The premium for fatal risk, likewise, survives every honest test: paid to those who can see the risk plainly and decline it, the price of danger is altogether real. So the theory holds where its assumptions hold, and fails where they fail — which is only to say that it is true, but conditionally; and the condition is the very competition whose absence has shadowed every plate of this volume. The compensating differential is real wherever the worker is free; and the frequency with which it goes missing is a measure of how often he is not.
Return, then, to the question this volume puts to every wage. The doctrine of compensating differences is, at bottom, the marginal theory's account of why the wage varies from one job to the next — the claim that the wage prices not the worker only but the work, and that the market, left to its own devices, will pay for hardship as faithfully as it pays for skill. It is worth, in the second plate's sense, in its most generous dress: the promise that a competitive and open labour market will compensate the collier for his danger and the night-worker for his stolen sleep, and equalise the whole reward of every calling for those who shoulder its particular burden. And it would be true — it is true — wherever the market keeps the conditions the theory asks of it. That it so often does not, that the worst jobs so reliably pay the least, is not the failure of Smith's insight but the vindication of this volume's: that the wage is settled not in the frictionless market of the diagram but in a real one, threaded through with the ignorance and the immobility and the imbalance of power that turn the differential a worker has earned into a saving an employer enjoys. The market promises to price the work. Whether it keeps the promise turns, as all things in this volume turn, on the contest of worth and power behind the price. These, at least, are the differences in the wage that a worker may be said to earn; the next plate takes up the harder case of the differences he does not. And the contest between the two — between the differential the worker is owed and the power that withholds it — remains, as the table is fond of saying, open.