HedonicWage_6

HedonicWage_6 - Hedonic Wage Theory Previously, we...

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Hedonic Wage Theory Read pages: 246-259 Hedonic Wage Theory Previously, we considered the worker’s choice of job given the wage offer and other characteristics of the job. Now, we will also consider the firm’s decision of how much to reduce undesirable working conditions. Together, the preferences of workers and production possibilities of firms will give us insight into the matching of the workers and firms. The undesirable working condition we will focus on is risk of injury, though the analysis can be generalized to any other undesirable conditions. Worker Preferences Workers have preferences over “bundles” – combinations of wage and risk of injury. In this case, risk of injury is increasing to the right so the indifference curves slope upward. Points to the northwest are preferred to points to the southeast. U 3 > U 2 > U 1 U 3 U 2 U 1 wage risk of injury Worker Preferences When wages are high and the risk of injury is high, like point A, workers are willing to forgo a large chunk of wages in exchange for a relatively small reduction in the risk of injury. Conversely, when wages are low and the risk of injury is low, like point B, workers are willing to forgo only a small amount of wages for a relatively large reduction in the risk of injury. U 3 U 2 U 1 wage risk of injury A B The worker’s indifference curves are convex reflecting the normal assumption of diminishing marginal rate of substitution. Worker Preferences At any given risk level, worker 1 is willing to forgo more wages to reduce risk than worker 2. Worker 2 is more sensitive to a loss in wages, while worker 1 is more sensitive to a increase in the risk of injury. wage risk of injury Workers differ in their preferences, particularly the rate a which they are willing to forgo wages to reduce the risk of injury. Worker 1’s indifference curve Worker 2’s indifference curve Assumptions 1) Utility Maximization Rather than income maximization 2) Worker Information Workers must be aware of important job characteristics for their own job and alternative jobs. 3)

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This note was uploaded on 10/22/2008 for the course ECON 470 taught by Professor Yeonsookim during the Fall '08 term at Maryland.

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HedonicWage_6 - Hedonic Wage Theory Previously, we...

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