Why Risky and Unpleasant Jobs Pay More

How the theory of compensating wage differentials explains pay differences for dangerous, dirty or inconvenient jobs, and why it does not always hold.

Why does a deep-sea diver earn more than a swimming coach, or a night-shift worker more than a day-shift worker with the same skills? One answer is compensating wage differentials.

Adam Smith’s insight

In The Wealth of Nations in 1776, Adam Smith observed that wages vary with how pleasant or unpleasant a job is. Jobs that are dirty, dangerous, stressful or at inconvenient hours must pay more to attract workers. Jobs that are enjoyable or prestigious may pay less, because people accept lower pay for the non-money benefits.

Examples

Dangerous work: mining, offshore oil rigs and high-rise construction often pay premiums for risk.
Night shifts: many factories and hospitals pay shift allowances.
Remote locations: workers in remote areas or hardship postings often get extra allowances.
Unpleasant tasks: some jobs involving waste or strong smells pay premiums in well-functioning labour markets.

The reverse is also true: people often accept lower pay for meaningful work, such as at non-profits, or for flexibility and job security.

Using it to value life

Economists use compensating differentials to estimate how much people value safety. If workers accept a small extra risk of death in return for higher pay, their choices imply a value of a statistical life. Governments use such estimates to evaluate safety regulations.

When it does not hold

In practice, many dangerous and unpleasant jobs are low-paid. Why?

Workers with few options, little education or no bargaining power may have to accept any job.
Information about risks may be poor.
Discrimination and social hierarchies, such as caste in India, can trap people in hazardous work. Manual scavenging, though banned, persisted among marginalised groups with little pay.
Weak enforcement of safety laws.

So compensating differentials work best when workers have real choices.

Two engineers

Two engineers have the same qualifications. One takes a job on an offshore oil platform, working three weeks on and three weeks off in tough conditions. The other works in a city office. The offshore engineer earns considerably more, compensating for the risk, isolation and time away from family.

Thinking pay always rises with job danger

Risky jobs pay more only when workers have alternatives and information. Many hazardous jobs are poorly paid because workers lack bargaining power.

Key takeaways

Compensating differentials mean unpleasant or risky jobs pay more to attract workers.
Adam Smith described the idea in 1776.
Economists use it to estimate the value of a statistical life.
It fails when workers lack choices, information or bargaining power.