The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal, or continually tending to equality … Actual differences of pecuniary wages and profits are due partly to counter-balancing circumstances, and partly to want of perfect liberty. (Adam Smith, 1976)

Until a man has had experience of a certain kind of work, he is unlikely to know it is dangerous and then the damage is often done. And even when the danger is known, most people are inclined to suppose they can escape dangers which overcome others. (Hicks, 1963)

Introduction

In a competitive market, workers whose jobs have undesirable aspects must be paid more if firms are to attract labour to these jobs. The classic discussion of such compensating differentials is by Adam Smith, who identified five job characteristics which would require compensating changes in pay (1976, 112ff):

1. a) the ‘agreeableness or disagreeableness’ of the job;

2. b) the ‘difficulty and expense’ of learning the job;

3. c) the ‘constancy or inconstancy’ of employment in the job;

4. d) the ‘small or great trust’ required of the person doing the job;

5. e) the ‘probability or improbability of success’ in the job.