Compensating Wage Differentials. Utility, not wages, should be equalized across jobs in a perf. competitive market. Utility is affected by hardship, risk.

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Chapter 8 Compensating Wage Differentials and Labor Markets.

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Presentation transcript:

Compensating Wage Differentials

Utility, not wages, should be equalized across jobs in a perf. competitive market. Utility is affected by hardship, risk of injury, risk of layoff, working with people, etc. Affects occupations, regions, countries,... Basic idea from Adam Smith, book 1, chapter 10 of Wealth of Nations. Hedonic model of Rosen (1974)

Basic Model Equally productive workers are mobile (across regions, occupations, firms, etc.) Marginal worker has perfect information. What is the necessary consumption that would compensate me (in terms of utility) for working in a noisy job? Firm side, equilibrium. Estimate hedonic (reduced-form) equation.

Equalizing Wage Differential for Workplace Safety (β 3 ) ln(w ij ) = β 0 + β 1 X i + β 2 Z j + β 3 risk j + ε ij How to measure risk? –Self-reported? Problem if workers differ in perception and ability to deal with risk. –Industry- or occupation-wide accident rate? Disregards workers heterogeneity. Worker unobservables affect not only wage but also their own risk (Shogren & Stamland JPE 2002): how tolerant / able to cope with risk?)

Workplace Safety and Equalizing Wage Differentials Simple regressions often give wrong sign. Solution to this endogeneity? –Use switchers to eliminate time-constant workers characteristics (But: are switchers random? IV for switching jobs (plant closure)). –Use a proxy for the unobservables. (Viscusi & Hersch, REStat 2001: Smokers select riskier jobs, get injured more and get lower comp. for risk of injury. Labor markets are segmented.)

An example: Night-Working UK LFS 123 Coeff on Night (0.013) (0.010) (0.015) Other Controls NoYes C-S/PanelC-SC-sFixed effects

Some related applications VSL: Ashenfelter &Greenstone: road safety Wage curve studies: how do regional wages react to regional unemployment? –Cross-section (steady state comparisons): Compensate workers for higher risk of job loss (higher unemployment rate): β>0 –Time differences (W rt -W rt-1 =β (U rt -U rt-1 )+…): Regional equilibration: lower wages when unempl. goes up to support job creation: β<0