topic 6-1. (ch. 8) compensating wage differentials
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Copyright © 2009 Pearson Education, Inc. 8- 1
Topic 6-1. (Ch. 8)
Compensating Wage Differentials
Copyright © 2009 Pearson Education, Inc. 8- 2
Compensating wage differential
Reduction in pay in return for an attractive job characteristics. Otherwise, jobs would be flooded with applicants.
Estimation: W = F(x) + b*PP: probability of injury, death, noise, stress, heat/cold, physical strength, lack of freedom, all disamenities
Risk and hazard on the job
1975 79 82 88 93Fatalities per 100,000
9.4 8.6 7.4 5.0 5.2
Incidence per 100
3.3 4.3 3.5 4.0 3.8
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Figure 8.1: A Family of Indifference Curves between Wages and Risk of Injury
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Figure 8.2: Representative Indifference Curves for Two Workers Who Differ in
Their Aversion to Risk of Injury
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Figure 8.3: A Family of Isoprofit Curves for an Employer
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Figure 8.4: The Zero-Profit Curves of Two Firms
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Figure 8.5: Matching Employers and Employees
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Figure 8.6: An Offer Curve
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Figure 8.7: The Effects of Government Regulation in a Perfectly Functioning
Labor Market
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Figure 8.8: A Worker Accepting Unknown Risk
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Evidences
Role of taste: some are challenging.Workers usually overestimate the probability
of rare workplace deathi) compensating differentials will be larger than would be required
ii) most informed workers will be found in the most dangerous job
Probability of being found and certainty of being penalized has an effect on improvement
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Other Amenities
Location amenities: quality of life matters(Sunshine, temperature, culture)
Government wage differentials: non-profit sector. Risks? Compensating wage differentials?-Long queues of workers
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Figure 8.9: An Indifference Curve between Wages and Employee Benefits
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Figure 8.10: An Isoprofit Curve Showing the Wage/Benefit Offers a Firm Might Be Willing
to Make to Its Employees: A Unitary Trade-Off
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Fixed amount of Fringe Benefit
Individuals may not choose between fringe benefits and wage (fixed fringe benefit)
Reasons of fixed fringe benefits i) Cost of benefit might be cheaper (economies
of scale) ii) Prohibit adverse selection and encourage long-
term attachment iii) In many cases, fringe benefits are tax
deductible Cafeteria –benefit plans: allow workers to choose
point on budget line provided by employers
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Figure 8.11: Alternative Isoprofit Curves Showing the Wage/Benefit Offers a Firm Might
Be Willing to Make to Its Employees: Nonunitary Trade-Offs
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Figure 8.12: Market Determination of the Mix of Wages and Benefits
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Figure 8A.2: The Choice between H’ Hours with Certainty and H’ Hours on Average
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