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

Copyright © 2009 Pearson Education, Inc.

Chapter 8

Compensating Wage Differentials and Labor Markets

Copyright © 2009 Pearson Education, Inc. 8- 2

Important Definitions - Job Matching

Pecuniary and Non Pecuniary Job Characteristics “Bad” Jobs vs. “Good” JobsCompensating Wage DifferentialsPositive Differentials and Negative DifferentialsTesting the The Theory of Compensating Wage Differentials


A Simple Theory of Job Choice

If we assume that:

1. Workers maximize utility, not income2. Workers are aware of work conditions3. Workers have a range of jobs to choose from

Then…


A Simple Theory of Job Choice

“All other things equal, employees in bad workingconditions will receive higher wages than thoseworking in more pleasant conditions.”

What are the “all other things” that we are assuming to be equal in making this prediction?


Hedonic Wage Theory and the Risk of Injury I

Represent Levels of Wages and Risks That Yield Same Level of UtilityCurves Are Positively-Sloped Curves to the Northwest Represent Higher Levels of Utility Curves Are Concave From Above - Diminishing Marginal UtilityIndividuals Differ in Their Attitude Toward RiskIndividuals Try to Achieve Highest Level of Utility

Characteristics of the Employee Indifference Curve


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


Figure 8.2: Representative Indifference Curves for Two Workers Who Differ in

Their Aversion to Risk of Injury



Represent Levels of Wages and Risks That Yield a Given Level of profitCurves Are Positively-Sloped Curves Are Concave From Below - Diminishing Marginal Returns to Safety ExpendituresFirms Will Operate on the Zero-Profit CurveSome Firms Can Reduce Risk more Cheaply Than Others

Characteristics of Isoprofit Curves


Figure 8.3: A Family of Isoprofit Curves for an Employer


Figure 8.4: The Zero-Profit Curves of Two Firms


Figure 8.5: Matching Employers and Employees



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


Figure 8.6: An Offer Curve


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


Occupational Safety and Health Act

1. Is there a need for workplace regulation?

2. What should be the goals of regulation?


Figure 8.7: The Effects of Government Regulation in a Perfectly Functioning

Labor Market


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?


Hedonic Wage Theory and Employee Benefits I

Payments in KindDeferred Compensation and Tax AdvantagesThe Employee’s Wage/Benefit Indifference CurveThe Employer’s Wage/Benefit Isoprofit CurveThe Offer Curve and Determination of Wages and Benefits

Why Employee Pay For Their Own Benefits


Figure 8.9: An Indifference Curve between Wages and Employee Benefits


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


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

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

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