Wages and wage differentials Wages are A mechanism for the allocation of labour – ”the right number of people with the right skills in the right jobs”. A mechanism for the distribution of income and welfare in society . Efficient allocation and equality in distribution sometimes pull in the same direction, sometimes in opposite directions…

Wage theories Compensating differentials Human capital Signalling Discrimination Efficiency wages Demand: MCE=MRPE (basic assumption – for modifications see ch. 9 and 11-5) Supply: Wage = marginal disutility of labour

How to measure wages in empirical studies? Basic idea: Wage per unit of time. Wage per hour. Full-time equivalent monthly/weekly/yearly wage. Assumes work hours per week/month and work weeks per year the same. NOT yearly or monthly labour income without adjustment for time worked. Before or after income tax? Net of tax and benefits most relevant for worker. Gross pay most relevant for employer. Work related benefits (fringe benefits) hard to quantify. Benefits mandated by law or collective agreements.

Compensating differentials Borjas ch. 5.1, 5.2 & 5.5 (not 5.3, 5.4) The disutility of labour depends on the utility of leisure but also on JOB CHARACTERISTICS Fun and interesting or boring and monotonous Safe or risky With or without health hazards, stress Physically light or heavy Prestigious or low-status Positive or negative work-content

According to the theory of compensating differentials, workers will require a higher wage to work in a “worse job”. Adam Smith: “The whole of the advantages and disadvantages of different employment of labour and stock must…be either perfectly equal or tending to equality.” We would expect a positive correlation between wages and unpleasantness of jobs workers who have stronger preferences/dislike for certain job characteristics to flock into/avoid jobs that have these. all else equal.

Analysis of welfare and of distribution of welfare must take into account that income is not the only determinant of utility. Welfare of workers involves the wage AND work environment & work conditions in a broad sense. If high wage and bad conditions go together, welfare is more equally distributed than wages. If low wage and bad conditions are correlated welfare is even more unequally distributed than wages.

not just theory… A historical example: The Triangle fire http://www.youtube.com/watch?v=hZPXzP4nXWY At present: 100 workers die in fires each year in Bangladesh. Other cases in Malaysia, China… Foxconn: http://www.youtube.com/watch?v=uyIocUMMCvE Fatal accidents at work in EU: http://www.av.se/dokument/statistik/eu/EU_AO_2008.pdf Construction is a dangerous industry: http://debatt.svt.se/2012/04/14/regeringen-kan-inte- blunda-for-alla-byggnadsarbetare-som-dor-pa-jobbet/

Source: The Swedish Work Environment Authority

Fatal accidents at work 2008 Number of cases Cases/100000 employed Total 67 1,5 of which: Agriculture, forestry, fishing 13 17,1 Extraction of minerals 2 25,6 Manufacturing 11 1,7 Construction 17 6 Transport and communikation 9 3,3 Other 15 Men 62 Women 5 Employees 53 Self-employed 14

Lift heavy objects (>15kg) several times/day The Swedish Work Environment Authority

Strain from one-sided movements

Pain in arms/shoulders every week

Sleep-problems due to thoughts about work at least one night per week

Exposed to violence or threats of violence some time during the last 12 months

Utility U = U(w, work conditions) For simplicity we assume that work conditions can be measured by one number on a scale. W Indifference curves of a worker who can make a trade-off between better work conditions and lower wage & poorer work conditions and higher wage. Good Work conditions

Please note what’s on the axis! 1 w^1 w0 U0 Wage Probability of Injury Dw^ On the horizontal axis : In text-book: Probability of injury. In my slides ”qood quality of job/work environment” The slide diagrams are the mirror image of those in the text book Borjas figure 6-1

Indifference curves for two different workers: Wage Work conditions A has stronger preferences for good work conditions, B has stronger preferences for high wage B A

The supply side: Assume that there are two kinds of jobs: Better and worse Each worker has a “reservation price” for accepting a worse job, a minimum wage differential necessary to make him/her choose the worse job if the better is available. The reservation prices will be different for different individuals, creating an upward sloping supply curve for the “worse” jobs.

The demand side: Assumptions: The firm can choose technology of production and level of investment in the work environment (e.g. job safety). To provide a better/safer/nicer work-place costs money. Not providing it means having to pay higher wages. That costs money too. The firm also makes a trade-off between work-environment and wages.

Isoprofit curves – the wage/work condition offers of a firm Work conditions

Wage/work condition offers of two different firms Work conditions The “blue firm” has a comparative advantage in high wage/poor condition jobs, the “red firm” in low wage/good condition jobs The dashed parts of the curves can’t be profitable

The hedonic wage function Isoprofit curves of three different firms and indifference curves of three workers Work conditions Each workers chooses a firm and a job that maximises his/her utility A curve joining the choices shows a negative relation between wages/conditions

Hedonic (Oxford dictionary of English) relating to, characterized by, or considered in terms of pleasant (or unpleasant) sensations.

But: Manual workers, particularly unskilled workers, have lower wages AND are more exposed to physical work hazards than non-manual workers. Higher level white collar workers have both the highest wages and the least work hazards. For example, among both women and men, unskilled manual workers are physically exhausted after each work week twice as often as higher level white collar workers according to the survey of The Swedish Work Environment Authority.

According to Level of living survey (LNU) 1991: For men in Sweden 1991: Poor physical work environment is correlated with lower wage. Poor psychologic work conditions correlated with higher wage. With controls for education, experience etc.: Mental strain and inconvienient hours of work  higher wage. Physically heavy work (lifting heavy objects)  lower wage. Monotonous work, noice – no correlation with wage.

If workers are heterogenous in terms of skill: Dashed curves show firms’ offers to workers with different productive skills Red curves show indifference curves of workers. wage All workers are assumed to have the same preferences in this model. We observe a positive relation between wages and work conditions even though each worker faces a negative relation. Work conditions

But what trade-offs can the least skilled and most vulnerable workers make? http://www.ilo.org/global/topics/child- labour/lang--en/index.htm http://www.youtube.com/watch?v=yfKJ8Mof6 lU&list=PL418A6833A1C5B483&index=24&fe ature=plpp_video