Topic 6-1. (Ch. 8) Compensating Wage Differentials

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*P P: 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 93 Fatalities 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

Figure 8.1: A Family of Indifference Curves between Wages and Risk of Injury

Figure 8.2: Representative Indifference Curves for Two Workers Who Differ in Their Aversion to Risk of Injury

Figure 8.3: A Family of Isoprofit Curves for an Employer

Figure 8.4: The Zero-Profit Curves of Two Firms

Figure 8.5: Matching Employers and Employees

Figure 8.6: An Offer Curve

Figure 8.7: The Effects of Government Regulation in a Perfectly Functioning Labor Market

Figure 8.8: A Worker Accepting Unknown Risk

Evidences Role of taste: some are challenging. Workers usually overestimate the probability of rare workplace death i) 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

Location amenities: quality of life matters 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

Figure 8.9: An Indifference Curve between Wages and Employee Benefits

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

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

Figure 8.11: Alternative Isoprofit Curves Showing the Wage/Benefit Offers a Firm Might Be Willing to Make to Its Employees: Nonunitary Trade-Offs

Figure 8.12: Market Determination of the Mix of Wages and Benefits

Figure 8A.2: The Choice between H’ Hours with Certainty and H’ Hours on Average