Compensating Differentials and Selective Incentives

Why do butchers earn more than bakers even though they're typically less educated? What does Uber driver data reveal about wage gaps? In part three of their series on favorite models, Tyler and Alex explore compensating differentials, Adam Smith's insight that wages adjust for a job's pleasantness, safety, and flexibility. But Tyler pushes back: in a world of increasing returns and clustering talent, are we moving toward winner-take-all dynamics where all good things come together instead of trading off?

Then they turn to Mancur Olson's theory of selective incentives. How do small groups organize to lobby for benefits while big groups struggle? And as markets become more competitive and surveillance more pervasive, are the village chieftains who once solved collective action problems disappearing from economic life, or reemerging in a different form?

Transcript: https://www.mercatus.org/marginal-revolution-podcast/compensating-differentials-and-selective-incentives

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Timestamps

00:00:35 - Compensating differentials overview
00:04:48 - Segmentation vs. Differentials
00:13:02 - Amenities and the gender pay gap
00:22:07 - Two Competing Theories
00:24:26 - How fixed costs complicate the picture
00:29:02 - There are many margins of adjustment!
00:31:39 - Mancur Olson and selective incentives
00:38:02 - Special interests or bad voters?
00:41:50 - The Waxing and waning of selective incentives
00:48:22 - Alternatives to Selective Incentives