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Chapter 8: Compensating Wage Differentials

Chapter 8: Compensating Wage Differentials. Compensating Wage Differentials. differences in pay designed to compensate for differences in non-wage job characteristics. Compensating wage differentials. Compensating wage differentials. Compensating wage differentials.

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Chapter 8: Compensating Wage Differentials

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  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.

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