Compensating Wages for Dangerous Job Workers


23 Mar 2015 06 Jun 2017

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Keywords: dangerous job wages, compensating wage danger, wage compensation

Explain why workers with dangerous jobs are paid more than workers with less dangerous jobs

The competition in the job market has shown an upward turn, when we talk about the opportunities for the job seekers. There are diversified fields for the job seekers based on their qualifications and experience. But another factor is also very vital when a person seeks a job; his / her own choice regarding environment and the workplace safety is equally important. Some people like to work in offices due to the peaceful, neat and clean environment but the same “paradise” may be “hell” for others just because they cannot handle the mental stress attached with the office jobs e.g. Accounting, Finance etc. On the other hand some people enjoy the jobs in the field of marketing, which would not be accepted by those who like to work in isolation. But there are some jobs, which are considered dangerous due to the nature of the workplace, or the work that needs to be carried out. Although none of the workers may like to work in dangerous conditions the compensation offered attracts individuals to come into this field. So, keeping in view all these factors the compensation package of the employee can be assessed (Roberts, Burton & Bodah, 2005).

Normally the jobs, which require higher skilled individuals is highly compensated when compared to jobs that require only lower or lesser skills. It is considered that the differential amount paid to the higher educated persons, is in compensation for the additional sacrifices and payment made by the person to obtain the skills and education necessary (Dumond, Hirsch & MacPherson, 1999). The workplace area and the safety at workplace catches the attention of the employees to demand extra wages. Smith used the words ‘hardship', ‘disagreeable' and ‘dirtiness' for the work of colliers in Newcastle to explain why they earned two or three times more than common laborers in Scotland (1976).

The statistics have been collected by the Bureau of Labour Statistics

These statistics have been published on CNN referring to an 18 year old logger who was killed on December 3, 2002. It clearly depicts that the risk factor involved in these jobs classifies them in the category of additional compensatory jobs.

The Timber Cutters are facing a high risk and the rate of mortality has been the highest for them when compared to other jobs. People involved in fisheries are at second with fatality rate of 71.1. Pilots and navigators are at third with the mortality rate of 69.8.

All these people work out of doors except the structural metal workers. People involved in driving, sailing, and even flying in the list given below - as high risk workers.

These are outdoor jobs, which are considered the most dangerous jobs. Therefore people in these jobs need the security and compensation as an attraction to continue doing the job. Employers, therefore offer special allowances and compensation along with medical facility, insurance, housing etc.

It is not only the risk that is involved in the job that increases compensation for these workers but many other factors. However the discussion of those factors is outside the scope of this paper and therefore will not be mentioned here. Some salient factors have been given below which shows why workers with dangerous jobs are paid more.

One is that there is a direct threat to a worker's health and life in a dangerous profession. If a worker is hurt due to the nature of job, he may loose a part of his body and sometimes even his life (Schumacher, & Hirsch, 1997). This could happen even though there are many workplace health and safety regulations in place and even though the supervisors and the employees themselves are trained on how to maximize safety in the work area. Further a direct threat to the life of a worker is also a threat to the stability and security for his or her dependants. This is because if the worker looses his life or his ability to work (due to injury or disability) the dependents would loose their safety net and can be made destitute (McDuff, 1999).

Different jobs have different health hazards

Different jobs have different health hazards and by implication different life expectancies. Workers in dangerous jobs are assumed to get a higher wages to compensate for the lower life expectancy and by measuring the size of that premium you can get a rough measure of the value of an extra year (Schumacher, & Hirsch, 1997). It turns out that this calculation gives a strong effect: the benchmark calculation assumes that a ten percent increase in life expectancy will generate a 0.24 percentage points increase in adjusted GDP growth (Osburn, 2000).

Workers may also need compensation for the stress and anxiety they have to face due to the dangers they are exposed to in the workplace (Mcgoldrick, 1995). For example armed forces stationed in high altitude locations are awarded extra allowance for the isolation at glaciers.

The dangerous jobs also need a high level of hard work and physical efforts, which is normally more than the efforts required in normal physical labour. Therefore the extra physical effort of the workers must be compensated by the employer, and this is another reason why employees in dangerous of physically demanding professions get higher wages (Miller, Mulvey & Norris, 1997).

Concluding the discussion above, it is evident that the dangerous jobs are facing high risk increasing the life uncertainty of the workers. They need life insurance for their life for their families and dependents.

Critically appraise the findings of empirical studies that have estimated compensating wage differentials.

In labour economics the term Compensation differential is use to describe and analyze the relationship between wage rate and the corresponding risk, unpleasantness and any dangerous attitudes that are entailed in the job. The term compensation differential is also known as “equalizing difference” or even “compensating wage differential”. A compensating wage differential refers to the additional compensation that is paid to a worker or an employee in order to motivate the individual to take on a job that is considered undesirable or even a dangerous in comparison to other jobs that are available in the market (Schettkat, 1993).

However it is noteworthy that “compensating differentials” does not apply only to dangerous and undesirable jobs, but also to extremely desirable jobs with special benefits. In the case of the latter, instead of being paid a higher compensation, the individuals concerned will be willing to accept a lower pay as the job entails benefits that are special and cannot be found elsewhere or with any other jobs. The difference here is however that instead of the compensation differential being positive it will be negative in the case of the latter example (Schettkat, 1993).

A lot of models have been presented by different authors around the globe regarding compensating wage differentials and many studies have been undertaken in this area. Based on these studies, surveys and analyses, findings have been published in the journals, newspapers and websites. These publications stressed the compensating wage differentials not only for the workers exposed to death due to accidents but for other reasons as well. The term ‘Risk Premium' is also used as an alternative to the compensating wage differentials for the workers doing dangerous jobs.

Marin and Psacharopoulos (1982), in the first paper using British data from the Office of Population Censuses and Surveys (OPCS) Occupational Mortality Decennial Supplement 1970-72, find evidence of a wage premium for exposure to fatal risk. Sandy and Elliott (1996) and Arabsheibani and Marin (2000) using similar data over the period 1979 to 1983, and Siebert and Wei (1994) using Health and Safety Executive (HSE) data for 1986 to 1988, all find evidence of a fatal risk premium.

Another study has been carried out in the Hong Kong regarding compensating wage differentials laying special emphasis on the risk associated with the workplace fatality. The data has been collected from the 1991 census and then it has been merged with the accident data provided by the Labour Department.

A theory has been presented by Thaler and Rosen in 1976. The estimation of compensating wage differentials has been carried out with the following formula

W = a0 + a1X + a2p + e

Where w is the wage rate, X a vector of individual and job characteristics, including the usual human capital variables; p is a measure of job risk and e is an error term. Over the past two decades studies have estimated compensating wage differentials by using this equation. The result normally suggests that a positive and significant compensating wage differential for the jobs with mortality risk is found mostly in the United States, the United Kingdom, Canada, Australia and Japan.

Another important factor the compensating wage differentials has been identified as; child penalty'.

The fact that mothers tend to earn less than women without children seems to be well established in the economic literature and is called child penalty or family gap. Several researchers found raw wage gaps of almost 20% for the US, 13% for the UK and up to 20% for Germany. In order to investigate the impact of motherhood on the choice between pecuniary and non-pecuniary job characteristics the German Socio-Economic Panel (GSOEP; 1984-2003) was used by Felfe in 2006. The sample of interest consists of women during their fertile years, defined as the age from 16 to 46. The dataset provides detailed information about personal and job characteristics, about pecuniary and in particular non-pecuniary ones. Besides it reports satisfaction with the job what is used as a proxy for utility and allows testing if both pecuniary and non-pecuniary job characteristics determine jointly the satisfaction of a mother. The longitudinal nature of the data allows observing mothers around first birth. The dataset used is the German Socioeconomic Panel (GSOEP), which is a yearly repeated survey of Germans and Foreigners in West and East Germany (1984-2003). Since 1984 the GSOEP follows the members of the panel. In 2003 the GSOEP provided information about more than 12000 households consisting of more than 24000 people

In order to test the hypothesis of the child penalty as a compensating wage differential, the following methodology, divided in three parts, has been conducted.

A first step was to investigate if motherhood really affects the job characteristics, i.e. if not only the pecuniary but also the non-pecuniary job characteristics change after motherhood and thus the loss of wage might be compensated with an increase in amenities. In order to estimate changes in job characteristics around and after motherhood, an event study analysis has been used which studies the effects of first birth on a variety of job characteristics. A second necessary step was to show if and how certain job features enter the utility of mothers. According to theory of compensating wage differentials both pecuniary and non-pecuniary characteristics determine jointly the utility of a worker. In case a mother is willing to give up part of her income in order to have a more family friendly job, certain job characteristics have to compensate for this loss in wage and thus raise the utility of a mother. In order to test this empirically, satisfaction regressions has been used. In a last step the actual compensating wage differential has been measured, i.e. how much of their wage mothers are willing to give up for having a job with more amenities (less disamenities). Therefore as a last step a hedonic wage regression has been run including certain (dis-) amenities as control variables.


The conclusion of the above discussion reveals that the compensating wage differentials have been studied by many of the analysts around the globe using different methodologies and statistics. These studies helped the users understanding the trend regarding compensating wage differentials and the impact on workers.


Abraham, J, Lluis, S. (2008) “Compensating Differentials and Fringe Benefits: Evidence from the Medical Expenditure Panel Survey 1997-2004”, retrieved on July 28th, 2009 from <>

Christie, L. (2003) “America's most dangerous jobs - The top ten most dangerous jobs in America”, CNN Money, retrieved on 28th July, 2009 from <>

Dumond, J. M., Hirsch, B. T., & MacPherson, D. A. (1999). “Wage Differentials Across Labor Markets and Workers: Does Cost of Living Matter?”. Economic Inquiry, 37(4), pp. 577-608.

Dupuy, A. & Smits, W. (2009), “How Large is the Compensating Wage Differential for R&D Workers?” Retrieved on July 28th, 2009 from <>

Felfe, C. (2006), “The child penalty - A compensating wage differential”, retrieved on July 28th, 2009 from <>

Lanfranchi, J., Ohlsson, H., & Skalli, A (2009) “Compensating Wage Differentials And Shift Work Preferences* Evidence from France”, retrieved on July 28th, 2009 from <>

McDuff, E. M. (1999). “Social Support and Compensating Differentials in the Ministry: Gender Differences in Two Protestant Denominations”. Review of Religious Research, 40(4), pp. 307-330.

Mcgoldrick, K. (1995). “Do Women Receive Compensating Wages for Earnings Uncertainty?”. Southern Economic Journal, 62(1), pp. 210.

Miller, P., Mulvey, C., & Norris, K. (1997). “Compensating Differentials for Risk of Death in Australia”. Economic Record, 73(223), pp. 363.

Osburn, J. (2000). “Interindustry Wage Differentials: Patterns and Possible Sources”. Monthly Labor Review, 123(2), pp. 34.

Polachek, S. W. & Siebert, S. W. (1993) Economics of Earnings. Cambridge University Press.

Roberts, K., Burton, J. F., & Bodah, M. M. (Eds.). (2005). Workplace Injuries and Diseases: Prevention and Compensation : Essays in Honor of Terry Thomason. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Schettkat, R. (1993). “Compensating Differentials? Wage Differentials and Employment Stability in the U.S. and German Economies”. Journal of Economic Issues, 27(1), pp. 153.

Schumacher, E. J., & Hirsch, B. T. (1997). “Compensating Differentials and Unmeasured Ability in the Labor Market for Nurses: Why do Hospitals Pay More?”. Industrial & Labor Relations Review, 50(4), pp. 557-579.

Siebert, W. S. & Wei, X (1998), “Wage Compensation for Job Risks: The Case of Hong Kong”, Asian Economic Journal, Vol 12 No. 2, retrieved on July 28th, 2009 from <>

“The Human Development Index. A better way of measuring welfare? Notes on Nick Crafts', ‘The human development index and changes in standard of living: some historical comparisons”. European Review of Economic History, Vol 1, (1997), retrieved on July 28th, 2009 from <>



The Bureau of Labour Statistics, retrieved on 28th July, 2009 from <>


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