The compensating differential principle in the public and private sector: A multivariate statistical analysis approach

The theory of compensating wage differentials suggests that firms offering jobs with disagreeable attributes such as probability of injury, inflexible work schedules, high risk of unemployment, or offering jobs involving physical effort, repetitive and monotonous activities, or requiring many hours of training and education should pay higher wages to persuade workers to work under such conditions. Using multivariate statistical analysis applied to the information provided by the Health and Retirement Study (1992-2000), this paper aims to compare the working conditions offered in the private sector with those enjoyed in the public sector, as a way to determine whether the compensating differential principle applies. Results indicate that public sector workers are offered both higher wages and better working conditions, which contradicts the equalizing principle.