Bài giảng Labour Market Economics - Chapter 8 Compensating Wage Differentials

Chapter EightCompensatingWage Differentials Created by: Erica Morrill, M.Ed Fanshawe CollegeChapter 8-1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusRelative pay rates across jobsDifferent wages for identical skillsSafety regulationAdequate compensation for unpleasant or risky jobs2© 2002 McGraw-Hill Ryerson Ltd.Theory of Compensating WagesAgreeableness/disagreeableness of jobEase/difficulty and expense of learning jobTurnover in that positionDegree of power and trust heldProbability or improbability of success in job3© 2002 McGraw-Hill Ryerson Ltd.Isoprofit ScheduleCombinations of wages and safety that the firm can provide and maintain the same level of profitExhibits a diminishing marginal rate of transformation between wages and safetyLower curves imply higher levels of profits4© 2002 McGraw-Hill Ryerson Ltd.Figure 8.1 a Isoproft ScheduleAFirm is providing little safety and can provide additional safety in a relatively inexpensive mannerBFirm is providing considerable safety and can provide additional safety only through the introduction of more sophisticated and costly proceduresWageSafetyIhIo5© 2002 McGraw-Hill Ryerson Ltd.Different Firms with Different Safety TechnologiesDifferent abilities to provide safety at a given costDifferent shaped isoprofit schedules for the same level of profit6© 2002 McGraw-Hill Ryerson Ltd.Figure 8.1 b Different Firms with Different Safety TechnologiesWagesSafetyI1Firm 1I2Firm 2Outer edge = Employer’s offer or market envelopeW1S*W27© 2002 McGraw-Hill Ryerson Ltd.Employers’ Offer CurveMaximum wages that will be offered for various levels of safetyPoints within will not be offered because the other firm can offer a higher wage at the same level of safety Employees will move to the firm supplying the highest wage for each level of safety8© 2002 McGraw-Hill Ryerson Ltd.Individual’s PreferencesIllustrated by an isoutility curvecombinations of safety and wage that yield the same level of utilityDifferent risk preferencesMay be willing to give up safety for a compensating risk premium9© 2002 McGraw-Hill Ryerson Ltd.Figure 8.2 Worker Indifference CurvesWSWSSingle individualTwo individualsUOUhABUbUaLess risk adverseMore risk adverse10© 2002 McGraw-Hill Ryerson Ltd.Equilibrium with Single Firm and a Single IndividualTangency between the isoutility curve and the isoprofit curveYields the optimal wage and safety level 11© 2002 McGraw-Hill Ryerson Ltd.Figure 8.3 a Market EquilibriumWagesSafetyECUCICWcScSingle Firm and Individual12© 2002 McGraw-Hill Ryerson Ltd.Equilibrium with Many FirmsAssuming perfect competition and informationindividuals will sort themselves into firms of different risks receive compensating wages Wage-safety locusvarious equilibrium combinations of wages and safety 13© 2002 McGraw-Hill Ryerson Ltd.Figure 8.3 b Many Firms and IndividualsWagesSafetyUcUaUmMarket Wage SafetyLocus14© 2002 McGraw-Hill Ryerson Ltd.Compensating WageEmployers will adopt the most cost-effective safety standards not necessarily the safest saving on compensating wages by increasing their safetyTermed “shadow” or “implicit” prices because they are embedded in the market wage 15© 2002 McGraw-Hill Ryerson Ltd.Characteristics of Wage-Safety LocusSlope is negativecompensating wages are required for reductions in safetyThe slope can change for different levels of safetyDetermined by the workers’ preferences and the firms technology for safety16© 2002 McGraw-Hill Ryerson Ltd.Alternative PortrayalWage-risk model Risk is portrayed on the horizontal axisThe same conclusions can be derived17© 2002 McGraw-Hill Ryerson Ltd.Figure 8.4 Wage-Risk Space PortrayalWagesRiskI3I2I1U1UmUaMarket wage-risklocus18© 2002 McGraw-Hill Ryerson Ltd.Effect of Safety RegulationPerfect Competitive Marketsregulation requiring an increased level of safety would cause one or both parties to be worse off19© 2002 McGraw-Hill Ryerson Ltd.Figure 8.5 a Response to Safety StandardWcScUcEcWrSrUrErIcReduced Worker Utility20© 2002 McGraw-Hill Ryerson Ltd.Figure 8.5 b Response to Safety StandardWcScUcEcIcReduced Employer ProfitsWrSrIr21© 2002 McGraw-Hill Ryerson Ltd.Figure 8.5 c Response to Safety Standards WageSafetyUSrI1I2I3Different Responses of different firms22© 2002 McGraw-Hill Ryerson Ltd.Imperfect InformationIf a worker misperceives utility than imposed safety standards could improve workers utility without making employers worse offProviding parties with correct information would also lead to optimal amounts of safety23© 2002 McGraw-Hill Ryerson Ltd.Figure 8.6 Effect of Imperfect  InformationWoSoUoEoWageSafetyUaSpUpWaSaSr24© 2002 McGraw-Hill Ryerson Ltd.Rationale for RegulationInformation is not perfectCompetition may not prevailWorker does not bear all the cost of an accidentSocial opinionWorker may prefer a safer environment 25© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Eight26© 2002 McGraw-Hill Ryerson Ltd.