Publisher Summary The chapter presents a discussion on the theory of equalizing differences. The theory of equalizing differences refers to observed wage differentials required to equalize the total monetary and nonmonetary advantages or disadvantages among work activities and among workers themselves. On the conceptual level, it can make legitimate claim to be the fundamental (long-run) market equilibrium construct in labor economics. Its empirical importance lies in contributing useful understanding to the determinants of the structure of wages in the economy and for making inferences about preferences and technology from observed wage data. Measurable job attributes on which compensating wage differentials have been shown to arise empirically include (1) onerous working conditions, such as risks to life and health, exposure to pollution, and so forth; (2) intercity and interregional wage differences associated with differences in climate, crime, pollution, and crowding; (3) special work-time scheduling and related requirements, including shift work, inflexible work schedules, and possible risks of layoff and subsequent unemployment; and (4) the composition of pay packages, including vacations, pensions, and other fringe benefits as substitutes for direct cash wage payments. Another important class of problems identifies work environments with investment rather than with consumption. Market equilibrium is defined by equality between demand and supply for workers on each type of job.

A Partial Survey of the Theory of Income Size Distribution

Chapter 12 The theory of equalizing differences

Distribution and development

In studies of income distribution, household income is the common measure of household welfare, although household per capita income is better since it automatically corrects for household size. Perhaps the continued use of the former is a consequence of the belief that in practice the two give very similar results. This paper shows that in many cases those results differ substantially. The disparity between two Malaysian distributions is illustrated by their cross tabulation. A quarter of the households in the lowest forty percent of the household income distribution is in the upper three quintiles of household per capita income; and 10 percent of the same lowest forty are in the highest two quintiles of the second distribution. The paper also shows that the distribution of benefits from public education is very inegalitarian if household income is used. The reverse occur if household per capita income is used. Similar reversals occur in comparisons involving partitions by occupation and sex of head of household. Woman headed households, for example, have sub-mean household incomes but their household income per capita equals the mean. The paper also examines the differences in the age-income profiles of the two distributions.

Household income or household income per capita in welfare comparisons

The articles collected in the three-volume set of Chicago Price Theory illustrate elements of continuity and change in the development of the Chicago School. Its editors stress a continuity in price theory at Chicago that runs from Frank Knight to Gary Becker. Our main contribution in this review essay is to emphasize the discontinuity in the Chicago price theory tradition between the Knight/Viner/Simons generation and the post-war Friedman/Stigler/Becker generation. Moreover, we argue that a more logical continuation runs from the Knight/Viner/Simons generation to the Alchian/Buchanan/Coase generation of Chicago price theory. The element of continuity we stress is one of understanding price theory as a study of market adjustment and adaptation under alternative institutional arrangements, rather than using price theory to identify a unique solution to an allocative problem. Whereas the former understanding of price theory was underemphasized under Friedman/Stigler/Becker, the latter understanding of Chicago price theory tradition was continued by Alchian/Buchanan/Coase.

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A Partial Survey of the Theory of Income Size Distribution

Citations

Chapter 12 The theory of equalizing differences

Distribution and development

Household income or household income per capita in welfare comparisons

Price Theory as Prophylactic Against Popular Fallacies

Self-Employed Workers: Returns to Education and Training.

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