1. Chapter 8: Compensating Wage Differentials

2. Compensating Wage Differentials
differences in pay designed to compensate for differences in non-wage job characteristics

3. Compensating wage differentials

4. Compensating wage differentials

5. Compensating wage differentials

6. Conditions for the existence of compensating wage differentials
workers maximize utility, not income,
workers have perfect information, and
sufficient labor mobility exists.

7. Hedonic Pricing Model
a commodity is sold that possesses a bundle of characteristics that vary across the products that are offered for sale in the market.
only the price of the “bundle” of characteristics is observed, not the price of each individual characteristic.
in the labor market, jobs differ in terms of a variety of characteristics (including stress, educational requirements, risk of injury, etc).

8. Indifference curves

9. Indifference curves

10. Differences in risk aversion

11. Isoprofit curves

12. Isoprofit curves

13. Differences in the cost of reducing risk

14. Wage-offer curve

15. Wage-offer curve

16. Optimal matching

17. Optimal sorting

18. Optimal sorting

19. OSHA requirements

20. OSHA requirements

21. Arguments against OSHA
If there is perfect information, OSHA requirements:
have no effect on the wellbeing of workers who are already working in safe jobs, and
lower the utility received by workers who prefer high-risk/high-wage jobs.

22. Arguments for OSHA
workers systematically underestimate the risk they face,
there are negative externalities associated with worker injuries and deaths, and
worker compensation programs and health insurance plans encourage workers to accept too much risk.

23. OSHA - imperfect information

24. OSHA - imperfect information

25. OSHA - imperfect information

26. OSHA - imperfect information

27. OSHA and externalities
family members and others suffer negative externalities when a worker is killed or injured on a job.
workers do not take this negative externality into account.
too much risk is accepted.

28. Worker compensation
the existence of worker compensation programs and health insurance programs reduce the cost of an injury or occupational related illness to a worker, encouraging them to take on more risk.