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ECON 381

ECON 381. Compensating differentials. We have talked about how workers care about non-wage job characteristics

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ECON 381

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  1. ECON 381 Compensating differentials

  2. We have talked about how workers care about non-wage job characteristics • We also talked about the “fixed wage” model, in which the straight-time wage adjusts to offset the overtime premium. The idea is that workers care about the overall value of their compensation package • What is the relationship between non-wage job characteristics and wages? Do lousy jobs pay more to compensate workers for bad conditions? How are non-wage job characteristics priced in the labour market?

  3. Workers’ preferences • Consider a job that has two characteristics, a wage and something else (e.g. safety, hours of work, prestige),. Let’s take the example of risk, R. • Both of the characteristics affect workers’ utility:

  4. Indifference curves • Negative slope • Convex • Don’t cross • U0>U1>U2 W U0 U1 U2 S

  5. Indifference curves Who is more risk-averse? A is willing to give up more wages than B in exchange for a given increase in safety. A values safety more, i.e. she is more risk-averse. W S

  6. Firms’ iso-profit functions W S

  7. Firms’ iso-profit functions Which firm can provide safety least expensively? Firm B requires a larger reduction in the wage rate to offset the costs of providing one more unit of safety. B can provide safety least expensively. W S

  8. Equilibrium – one firm, one worker • Competitive equilibrium – firms make zero profits • Equilibrium at tangency point W W* S S*

  9. Equilibrium – two firms, two workers Which worker is matched with which firm? Why? Person A likes safety more. She is matched to Firm A, which can provide safety at lower cost. W S

  10. Equilibrium – many firms, many workers Locus of tangencies traces out hedonic relationship between wages and safety. Slope of hedonic relationship is the market price of safety. W S

  11. Minimum safety standards Minimum safety standard = Smin. W S Smin

  12. Minimum safety standards Minimum safety standard = Smin. W S Smin

  13. Minimum safety standards Minimum safety standard = Smin. Firm C goes out of business. W S Smin

  14. Minimum safety standards Minimum safety standard = Smin. Worker C gets lower utility. W S Smin

  15. Minimum safety standards • Does this mean that occupational health and safety regulations are a bad idea? Prof. Simon D. Woodcock

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