Worker Learning and Compensating Differentials

Abstract

In the standard compensating wage differential model, workers value their wage and workers' compensation components based on full job risk information. Market forces generate positive wage differentials as ex ante compensation for exposure to relatively high risk. Similarly, market forces generate wage offsets for the increases in ex post risk compensation embodied in workers' compensation benefits. These predictions can be modified to take into account potential imperfections in worker information, as in Viscusi (1979a,b, 1980a,b,d), where the role of learning is incorporated into the worker's decision model. The potential for learning about risks introduces a new market response through worker quitting after the acquisition of adverse risk information. In a full information world, after controlling for health status, no unexpected job risk-quit relationship will be observed. In the more realistic sequential decision model in which there is an opportunity for learning, the acquisition of adverse new information by the worker on the job may lead the worker to quit. With the exception of the experimental results reported in Viscusi and O'Connor (1984), in which worker responses to alternative chemical labels were monitored, tests of the standard compensating differential model and of the learning models have been distinct, as each focuses on a different aspect of labor market behavior. The empirical evidence supporting compensating risk differentials is substantial: greater job risks boost worker wages, and workers are willing to accept a wage cut in return for higher workers' compensation benefits.' These results are the main predictions of the standard compensating differential theory, and they continue to hold if learning is introduced. Market tests of the role of worker learning, on the other hand, have focused on two other empirical issues-the effect of injury experiences on workers' risk perceptions and the positive effect of job risks on worker quitting. The focus of this paper is broader than that of separate analyses of the wage and quit effects of job risks because we use the relationships typically estimated and tested in the standard compensating differential theory to examine the job risk-learning model as well. In particular, using a large data set on workers in the early 1980s, we evaluate the tradeoffs between wages and workers' compensation benefits and between wages and risks implied by worker quit behavior, and compare these tradeoffs across worker tenure groups.