A compensating differential, which is also called a compensating wage differential or an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform.

What is meant by a compensating wage differential?

Compensating wage differentials are higher wages (than can seemingly be explained by reference to skill level or human capital) that are paid to workers who perform jobs that have particular hazards or other unpleasant features associated with them.

What is a compensating differential example?

Wage differentials observed in the labor market are often compensating wage differentials. ... For example, coal miners, deep sea divers, and security guards are likely to be paid higher wages than similar jobs due to the hazardous nature of their duties.