This paper examines compensating wage differentials for an individual utility maximizing worker in a two-period framework in which labor supply is endogenous. Comparisons are made for a flat-rate and a two-tier pension containing an earnings-related component, allowing for other taxes and transfers. It is found that the elasticities vary substantially according to preferences and the wage rate, and the elasticity of earnings with respect to pensions can take both positive and negative values. The empirical literature has, however ignored labor supply effects and has concentrated on specifications involving a constant elasticity of minus one, with very little success. The present paper argues that such a specification is not appropriate. Copyright 1994 by Scottish Economic Society.
