This chapter explains how working conditions and wages are jointly determined. Overall productivity limits total compensation but then how total compensation is split between monetary wages and other working conditions is largely driven by employee preferences. Safer and more pleasant working conditions are what economists call normal goods. When worker compensation goes up, workers demand greater safety and better conditions. Thus, the poor working conditions in sweatshops largely reflect the fact that these workers are desperately trying to feed, clothe, and shelter their families and prefer the bulk of their compensation in monetary wages. The chapter explains how legally mandating better conditions makes workers worse off by both unemploying some workers and changing the mix of compensation into a less desirable mix from the workers’ perspective. It illustrates this lesson with survey evidence from sweatshop workers in Guatemala.

This chapter covers compensating differentials, the theoretical foundation for most of the book. The key idea follows from Chapter 1's broad definition of compensation as “everything a worker likes about the job”. Jobs have many positive and negative characteristics, and workers vary in how much they value (or dislike) these characteristics. Positive job characteristics are a form of non-monetary pay, and negative characteristics diminish a worker’s effective pay. Holding other job characteristics constant, workers must be paid more to compensate them for a particular negative job characteristic and, similarly, are willing to accept less monetary pay when they enjoy a particular positive job characteristic. Workers sort across different jobs and employers based on their preferences for those job characteristics. The size of the wage differential (arising from a particular job characteristic) that occurs in the market is determined by the “marginal worker's” preferences for that job characteristic. Through a series of extensive examples, the reader is led to a thorough understanding of the marginal worker and compensating differentials, concepts which recur throughout the book.

This chapter covers compensating differentials, the theoretical foundation for most of the book. The key idea follows from Chapter 1's broad definition of compensation as “everything a worker likes about the job”. Jobs have many positive and negative characteristics, and workers vary in how much they value (or dislike) these characteristics. Positive job characteristics are a form of non-monetary pay, and negative characteristics diminish a worker’s effective pay. Holding other job characteristics constant, workers must be paid more to compensate them for a particular negative job characteristic and, similarly, are willing to accept less monetary pay when they enjoy a particular positive job characteristic. Workers sort across different jobs and employers based on their preferences for those job characteristics. The size of the wage differential (arising from a particular job characteristic) that occurs in the market is determined by the “marginal worker's” preferences for that job characteristic. Through a series of extensive examples, the reader is led to a thorough understanding of the marginal worker and compensating differentials, concepts which recur throughout the book.