Chapter 8: Compensating Wage Differentials

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Chapter 8 Compensating Wage Differentials
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Compensating Wage Differentials

• differences in pay designed to compensate for
  differences in non-wage job characteristics

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Compensating wage differentials
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Compensating wage differentials
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Compensating wage differentials
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Conditions for the existence of compensating wage
differentials

• workers maximize utility, not income,
• workers have perfect information, and
• sufficient labor mobility exists.

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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).

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Indifference curves
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Indifference curves
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Differences in risk aversion
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Isoprofit curves
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Isoprofit curves
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Differences in the cost of reducing risk
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Wage-offer curve
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Wage-offer curve
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Optimal matching
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Optimal sorting
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Optimal sorting
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OSHA requirements
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OSHA requirements
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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.

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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.

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OSHA - imperfect information
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OSHA - imperfect information
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OSHA - imperfect information
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OSHA - imperfect information
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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.

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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.