1. Wages and wage differentials
Wages are
A mechanism for the allocation of labour – ”the right number of suitably skilled people 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…

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

3. 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

4. Compensating differentials Borjas ch. 5. 1, 5. 2 & pp. 222-224 Not 5
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

5. 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/antipathies for certain job characteristics to flock into/avoid jobs that have these.
all else equal.

6. Analysis of welfare and of distribution of welfare must take into account that income is not the only determinant of utility.
Comparing the welfare of different workers involves comparison of wage AND of 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.

7. Source: The Swedish Work Environment Authority

8. Fatal accidents at work 2008
Number of cases
Cases/ 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

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

10. Strain from one-sided movements

11. Pain in arms/shoulders every week

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

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

14. 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

15. Please note what’s on the axis!1
w^1 w0 U0
Wage
Probability of Injury
Dw^
On the horizontal axis the text-book measures probability of injury– which is negative. In the slides ”qood quality of job/work environment” is measured on the horizontal axis – that is something positive. Therefore, all the slide diagrams are mirror images of those in the text book. (To make them analogous to consumption choice and labour supply theory.)
Borjas figure 5-1

16. 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

17. 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 difference 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.

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

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

20. 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

21. 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

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

23. 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.

24. 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 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

25. 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