1. Copyright © 2009 Pearson Education, Inc. Chapter 8 Compensating Wage Differentials and Labor Markets

2. Copyright © 2009 Pearson Education, Inc. 8- 2 Important Definitions - Job Matching Pecuniary and Non Pecuniary Job Characteristics “Bad” Jobs vs. “Good” Jobs Compensating Wage Differentials Positive Differentials and Negative Differentials Testing the The Theory of Compensating Wage Differentials

3. Copyright © 2009 Pearson Education, Inc. 8- 3 A Simple Theory of Job Choice If we assume that: 1.Workers maximize utility, not income 2.Workers are aware of work conditions 3.Workers have a range of jobs to choose from Then…

4. Copyright © 2009 Pearson Education, Inc. 8- 4 A Simple Theory of Job Choice “All other things equal, employees in bad working conditions will receive higher wages than those working in more pleasant conditions.” What are the “all other things” that we are assuming to be equal in making this prediction?

5. Copyright © 2009 Pearson Education, Inc. 8- 5 Hedonic Wage Theory and the Risk of Injury I Represent Levels of Wages and Risks That Yield Same Level of Utility Curves Are Positively-Sloped Curves to the Northwest Represent Higher Levels of Utility Curves Are Concave From Above - Diminishing Marginal Utility Individuals Differ in Their Attitude Toward Risk Individuals Try to Achieve Highest Level of Utility Characteristics of the Employee Indifference Curve

6. Copyright © 2009 Pearson Education, Inc. 8- 6 Figure 8.1: A Family of Indifference Curves between Wages and Risk of Injury

7. Copyright © 2009 Pearson Education, Inc. 8- 7 Figure 8.2: Representative Indifference Curves for Two Workers Who Differ in Their Aversion to Risk of Injury

8. Copyright © 2009 Pearson Education, Inc. 8- 8 Hedonic Wage Theory and the Risk of Injury I Represent Levels of Wages and Risks That Yield a Given Level of profit Curves Are Positively-Sloped Curves Are Concave From Below - Diminishing Marginal Returns to Safety Expenditures Firms Will Operate on the Zero-Profit Curve Some Firms Can Reduce Risk more Cheaply Than Others Characteristics of Isoprofit Curves

9. Copyright © 2009 Pearson Education, Inc. 8- 9 Figure 8.3: A Family of Isoprofit Curves for an Employer

10. Copyright © 2009 Pearson Education, Inc. 8- 10 Figure 8.4: The Zero-Profit Curves of Two Firms

11. Copyright © 2009 Pearson Education, Inc. 8- 11 Figure 8.5: Matching Employers and Employees

12. Copyright © 2009 Pearson Education, Inc. 8- 12 Hedonic Wage Theory and the Risk of Injury I Shows the Offers That Firms Can Afford to Make That Are Acceptable to Workers Offers Along Only the Most Northwest Segments Are Acceptable to Workers Characteristics of Offer Curves

13. Copyright © 2009 Pearson Education, Inc. 8- 13 Figure 8.6: An Offer Curve

14. Copyright © 2009 Pearson Education, Inc. 8- 14 Major Conclusions of Hedonic Wage Theory 1.Wages rise with risk 2.Workers with strong preferences for safety will take jobs with firms where safety can be generated most cheaply

15. Copyright © 2009 Pearson Education, Inc. 8- 15 Occupational Safety and Health Act 1.Is there a need for workplace regulation? 2.What should be the goals of regulation?

16. Copyright © 2009 Pearson Education, Inc. 8- 16 Figure 8.7: The Effects of Government Regulation in a Perfectly Functioning Labor Market

17. Copyright © 2009 Pearson Education, Inc. 8- 17 Using Cost-Benefit Analysis to Evaluate Workplace Regulation Benefits: How much are workers willing to sacrifice for a given reduction in risk? Costs: How much do firms have to reduce wages to reduce risk, while keeping profits constant?

18. Copyright © 2009 Pearson Education, Inc. 8- 18 Hedonic Wage Theory and Employee Benefits I Payments in Kind Deferred Compensation and Tax Advantages The Employee’s Wage/Benefit Indifference Curve The Employer’s Wage/Benefit Isoprofit Curve The Offer Curve and Determination of Wages and Benefits Why Employee Pay For Their Own Benefits

19. Copyright © 2009 Pearson Education, Inc. 8- 19 Figure 8.9: An Indifference Curve between Wages and Employee Benefits

20. Copyright © 2009 Pearson Education, Inc. 8- 20 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

21. Copyright © 2009 Pearson Education, Inc. 8- 21 Figure 8.12: Market Determination of the Mix of Wages and Benefits