Compensating wage differentials, occupational health and safety, and the value of human life: An efficiency wage analysis

The classical theory of compensating wage differentials suggests that market economies allocate hazardous working conditions efficiently and equitably across workers. It is also the foundation for attempts to measure workers' willingness to pay for reduction in the risk of premature death. This dissertation reviews both the theoretical and empirical controversies surrounding wage compensation and finds anomalies for the hypothesis. A review of efforts to achieve compensation in practice, through both markets and public intervention, demonstrates that it is a goal yet to be realized. In addition, a survey of the value-of-life literature indicates that, while values derived from the labor market have become influential, they are subject to wide variation across specification and data sets. An alternative approach to labor market analysis, the efficiency wage hypothesis, is introduced and situated within the emerging literature on agency and incentives. A formal model of a labor market in which workers vary their intensity in response to the threat of dismissal is introduced, and it is demonstrated that workers in unsafe jobs are likely to receive less than fully-compensating wage differentials for assuming greater occupational risks. A continuous index of workers' labor market status is added, generating further downward bias on compensation. These results are shown to formalize longstanding criticisms of classical wage compensation theory, and they suggest causes for some of the discrepancies in the empirical literature. Policy measures likely to augment wage compensation are identified, and consideration is given to the limits of existing efficiency wage models.