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

2. 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

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

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

5. Figure 8.3: A Family of Isoprofit Curves for an Employer

6. Figure 8.4: The Zero-Profit Curves of Two Firms

7. Figure 8.5: Matching Employers and Employees

8. Figure 8.6: An Offer Curve

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

10. Figure 8.8: A Worker Accepting Unknown Risk

11. 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

12. 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

13. Figure 8.9: An Indifference Curve between Wages and Employee Benefits

14. 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

15. 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

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

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

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