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The theory of compensating wage differentials predicts that there will be apositive relationship between wages and poor working conditions and thatworkers are fully compensated for poor working conditions through their wage.In this article, we first present a theoretical model of compensating wage differentialsunder the assumption of a perfectly competitive labor market to confirmthese predictions. We then show that empirical studies have found evidencethat contradicts these theoretical predictions. Specifically, we introducestudies that show the following: (i) workers are not matched with their desiredworking conditions, and those workers who report dissatisfaction with theirhours change employers to work in jobs that are more consistent with theirpreferred hours; and (ii) workers are overcompensated for poor working conditions.We provide two theoretical models that are more consistent with theobserved empirical patterns. The first is an equilibrium labor search model inwhich a job is a package of wages and working hours, while the second is a“rat-race” model in which professional employees are required to work inefficientlylong hours. Finally, we offer suggestions for offering more flexible jobs(e.g., restricted regular employees) in the Japanese labor market. |
