Which of the following best describes the concept of compensating differentials in labor economics?

• A. Wage differences that arise to compensate workers for undesirable job characteristics, such as risk or unpleasant working conditions.
• B. Wage differences that result from differences in education and skill levels among workers.
• C. Wage differences due to discrimination in the labor market.
• D. Wage differences caused by government-imposed minimum wage laws.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand that compensating differentials refer to wage differences that arise to balance out non-monetary aspects of jobs, such as risk, unpleasant conditions, or other undesirable characteristics.
2. Step 2: Recognize that these wage differences serve as a form of compensation to make less desirable jobs more attractive to workers, ensuring labor supply despite the job's drawbacks.
3. Step 3: Differentiate compensating differentials from other causes of wage differences, such as variations in education, skills, discrimination, or government policies, which are separate concepts.
4. Step 4: Identify that the key feature of compensating differentials is the trade-off between higher wages and undesirable job attributes, which is a fundamental idea in labor economics.
5. Step 5: Conclude that the best description of compensating differentials is 'Wage differences that arise to compensate workers for undesirable job characteristics, such as risk or unpleasant working conditions.'