Your Money or Your Life?

Abstract: The theory of the hedonic wage model and compensating wage differentials dates back to the times of Adam Smith, and this study attempts to investigate, using econometric analysis, whether the Swedish labor market can give any claim to these theories. A brief background to the health economics discipline is followed by relevant theory and research in the field of compensating wage differentials. Using an alternative approach based on the wage change equation formulated by Charles Brown, and comparing the results to a previous study by Duncan and Holmlund, an econometric analysis is then performed. The empirical results do not yield any clear evidence in any direction regarding the existence of compensating wage differentials, although some indications appear supporting the theory of limited omitted variable bias and measurement error using the wage change equation in place of a conventional wage level equation.