Welcome to the Profit of Education website. Continuing the conversation begun in the book Profit of Education, we discuss the latest economic evidence on education reform.

Vergara and compensating wage differentials

The Vergara is the stunning education event of the year. Maybe of the decade. What is to be said about the economics of the decision?

Suppose that tenure really disappears. Whether you think tenure is a good idea or bad, a promise that you can’t be fired and that after a few years on the job you’ll never be laid off is valuable to a worker.

Providing foosball tables to high-tech employees makes for happy workers, which means Silicon Valley employers can pay employees a little less than if the workplace were a game-free zone. The wage saving may or may not be worth more than the price of a foosball table (plus the cost if workers would rather foos than work). But there will be some wage saving. Economists call this a “compensating wage differential.”

In the same vein, the job security that comes with the existing tenure/seniority system has economic value to teachers. If teaching jobs become no more secure than other jobs, schools will have to raise teacher pay to make up for the compensating differential implicit in the existing high-job-security world.

How much extra will we have to pay teachers? I think the answer is pretty clearly “who knows?” The one number I’ve found, estimated by John Aboud and Orley Ashenfelter, is 40 years old. For whatever it may be worth today, Aboud and Ashenfelter put the teacher compensating wage differential in the 1 to 5 percent range.

Because the outside-teaching labor market is so much more uncertain now-a-days, it would be reasonable to guess that the compensating wage differential is higher today. How high is anyone’s guess.

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