econ 381 compensating differentials. we have talked about how workers care about non-wage job...
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ECON 381
Compensating differentials
We have talked about how workers care about non-wage job characteristics
We also talked about the “fixed wage” model, in which the straight-time wage adjusts to offset the overtime premium. The idea is that workers care about the overall value of their compensation package
What is the relationship between non-wage job characteristics and wages? Do lousy jobs pay more to compensate workers for bad conditions? How are non-wage job characteristics priced in the labour market?
Workers’ preferences
Consider a job that has two characteristics, a wage and something else (e.g. safety, hours of work, prestige),. Let’s take the example of risk, R.
Both of the characteristics affect workers’ utility:
Indifference curves
Negative slope Convex Don’t cross U0>U1>U2
S
W
U2
U1
U0
Indifference curves
Who is more risk-averse?
A is willing to give up more wages than B in exchange for a given increase in safety. A values safety more, i.e. she is more risk-averse.
S
W
Firms’ iso-profit functions
S
W
Firms’ iso-profit functions
S
W
Which firm can provide
safety least expensively?
Firm B requires a larger reduction in the wage rate to offset the costs of providing one more unit of safety.
B can provide safety least expensively.
Equilibrium – one firm, one worker
S
W
Competitive equilibrium – firms make zero profits
Equilibrium at tangency point
S*
W*
Equilibrium – two firms, two workers
S
W
Which worker is matched with which firm?
Why?
Person A likes safety more. She is matched to Firm A, which can provide safety at lower cost.
Equilibrium – many firms, many workers
S
W
Locus of tangencies traces out hedonic relationship between wages and safety.
Slope of hedonic relationship is the market price of safety.
Minimum safety standards
S
W
Minimum safety standard = Smin.
Smin
Minimum safety standards
S
W
Minimum safety standard = Smin.
Smin
Minimum safety standards
S
W
Minimum safety standard = Smin.
Firm C goes out of business.
Smin
Minimum safety standards
S
W
Minimum safety standard = Smin.
Worker C gets lower utility.
Smin
Minimum safety standards
Does this mean that occupational health and safety regulations are a bad idea?
Prof. Simon D. Woodcock
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