Compensating wage differences
Abstract The paper develops a model of the allocation of workers to jobs based on individual's preferences for job satisfaction vs earnings. Given the distribution of levels of job satisfaction and productivities, it is possible to solve explicitly for wages as a function of job satisfaction. More productive individuals will take more (less) satisfying jobs whenever the elasticity of substitution between job satisfaction and earnings is less (greater) than one. The paper also discusses the effects of inequality on earnings of high and low productivity workers and the effects of compensating wage differences on the distribution of earnings.