Every time I see a story like this in the news, my first thought is compensating differentials. The New Zealand Herald reported yesterday:
A Perth mining company has been forced to look for workers from New Zealand after Aussies continually turned down a $300,000 job.
Mineral Resources has launched an advertising campaign targeting Kiwi tradies, guaranteeing “a great pay packet”, News Hub reported.
“We’re offering plenty,” Mineral Resources CEO Mike Grey told NZ programme AM.
“The incentives are amazing, and I have no doubt that our salaries double [New Zealand salaries], in some examples, they triple.”
The old adage that when something seems too good to be true, it usually is, applies. When a job is offering a pay package that is far higher than comparable work elsewhere, you should be asking, what is wrong with that job? There must be something about the job that means the employer has to pay a much higher salary in order to attract people to work there.
Wages differ for the same job in different firms or locations. Consider the same job in two different locations. If the job in the first location has attractive non-monetary characteristics (e.g. it is in an area that has high amenity value, where people like to live), then more people will be willing to do that job. This leads to a higher supply of labour for that job, which leads to lower equilibrium wages. In contrast, if the job in the second area has negative non-monetary characteristics (e.g. it is in an area with lower amenity value, where fewer people like to live), then fewer people will be willing to do that job. This leads to a lower supply of labour for that job, which leads to higher equilibrium wages. The difference in wages between the attractive job that lots of people want to do and the dangerous job that fewer people want to do is called a compensating differential.
Is the $300,000 salary for working in the Australian mines a compensating differential? It seems so:
Despite the high incomes and generous incentives, mining might not be the ideal career for everyone.
One of the downsides to the job is at least two-week blocks of work in isolated areas with sometimes basic living conditions.
The 12-hour shifts often involve heavy physical labour in a high-pressure environment where mistakes can cost a company millions and so result in instant redundancy, meaning a high turnover rate of staff.
The high salary is compensation for the negative non-monetary characteristics of the job. The worst negative characteristic (for most people) would be spending long periods of time in a remote location, far from nice amenities. The premium that the mining companies are offering isn't enough to entice Australians to work there. Australian wages are higher than New Zealand wages, so the pay premium is larger for a New Zealander working in the mines than for an Australian. By advertising in New Zealand, the mining companies are hoping to take advantage of that. Of course, remote Australia is even more remote from New Zealand than it is from the rest of Australia. Maybe they'll just have to offer to pay even more?
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