If a firm has two plants and workers at Plant 1 are paid $40,000 a year and workers at Plant 2 are paid $45,000, the $5,000 difference in salary is a compensating wage differential.

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Quizplus · Accepted Answer

A compensating wage differential refers to the difference in wage paid to workers in different locations or with different job characteristics to compensate for differences in non-monetary factors such as cost of living, job risk or job amenities. In this case, the $5,000 difference in salary between workers at Plant 1 and Plant 2 may be due to differences in factors such as cost of living, availability of labor or job amenities, thus making it a compensating wage differential.

If a Firm Has Two Plants and Workers at Plant