Question

The question is from the textbook Inequality, Discrimination, Poverty, and Mobility Question 1 from chapter 6:

"One could argue that a long commute to work is an undesirable characteristic of any job. If most people live in the suburbs, what would the theory of compensating wage differentials predict about the relative wages of jobs in the suburbs versus wages in jobs located downtown (ceteris paribus)? Explain. What are some people loved working downtown and did not mind the commute? Explain.

Answer 1

The theory of compensating wage differential states that workers who bear extra risk or undertake extra efforts or use special skills to get their work done should be paid a little more than the other workers at the same level. This difference in wages is called efficiency wages.

If most people are located in suburbs, then relative wages of jobs in dowtown would be higher than in suburbs because people would be taking extra efforts to commute daily to such a long distance.

People who love working downtown would not mind the commute because they will not only do what they love but will also be compensated in the form of efficiency wages.