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

Conditions for the existence of compensating wage differentials

workers maximize utility, not income,

workers have perfect information, and

sufficient labor mobility exists.

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).

Indifference curves

Indifference curves

Differences in risk aversion

Isoprofit curves

Isoprofit curves

Differences in the cost of reducing risk

Wage-offer curve

Wage-offer curve

Optimal matching

Optimal sorting

Optimal sorting

OSHA requirements

OSHA requirements

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.

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.

OSHA - imperfect information

OSHA - imperfect information

OSHA - imperfect information

OSHA - imperfect information

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.

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.