HW_C8 - Cha$ter ) Com$ensating Wage 1i22erentials and Labor...

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Cha$ter ) Com$ensating Wage 1i22erentials and Labor Mar8ets Chapter 8 introduces students to the concept of compensating wage differentials. Following the practice in earlier chapters, it seeks to move students from concepts they are familiar with to new concepts and tools. Again, the analysis begins with a !erba& exposition of occupational choice and the wage outcomes that flow from this choice when jobs differ along nonpecuniary dimensions. Once the essential assumptions and predictions of economic theory in this context are explained, we introduce students to a graphic analysis that is intended to yield additional insights. The graphic analysis of the issue of occupational choice is also intended to provide students with a tool for analyzing the effects of government policies on the labor market. We first apply the concepts of hedonic theory to a “bad:” job injuries. Policy implications are related to occupational safety and health legislation. We then apply the theory to an analysis of how elements in the employment “package” on which employees place a positi!e value affect the wage rate. The application in this section of the chapter relates to the regulation of employee benefits, particularly pensions. For those who wish to enrich the coverage in Chapter 8, we have added an appendix that analyzes worker choice of jobs that have different probabilities of layoff. This appendix offers another application of the theory of compensating wage differentials to an interesting policy problem, and in so doing elucidates certain issues not commonly understood. The analysis also introduces the student to the notions of “risk aversion” and the willingness to pay for insurance (“certainty”). ! List of Major Concepts 1. In the context of full information and choice, worker behavior will generate compensating wage differentials for job characteristics that are unpleasant or costly. 2. Compensating differentials play a dual role in allocating labor to unpleasant jobs and in compensating those who accept unpleasant work. 3. The prediction that there will exist compensating wage differentials for unpleasant work rests on assumptions of utility maximization, worker information, and worker mobility. 4. Employee preferences are graphically expressed in the concavity and slope of indifference curves. 5. Employers with different costs of eliminating unpleasant job characteristics can be graphically represented. 6. A market equilibrium curve (or offer curve) is derived from the zero-profit isoprofit curves of the employers in the market. 7. If the market is working properly, employees who are least averse to an unpleasant job characteristic become employed with firms that find it most expensive to eliminate that characteristic.
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Chapter 8 Compensating Wage Differentials and Labor Markets 49 8. The theory of compensating differentials can only be tested using techniques that control for other influences on job characteristics. 9.
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HW_C8 - Cha$ter ) Com$ensating Wage 1i22erentials and Labor...

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