Lecture 6 Compensating Wage Differentials PDF

Lecture 6 Compensating Wage Differentials PDF -...

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Compensating Wage Differentials Chapter 6
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Chapter 6: Compensating Wage Differentials So far we assumed all workers are equal In reality workers AND jobs are different (heterogenous) Jobs differ in wage AND amenities workers differ in skills AND preferences for those amenities Wages don’t need to be exactly equal for the labor market to be in equilibrium Workers with same observed characteristics (i.e. education, experience, age) might get different wages
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Risky Jobs and the reservation price Assume: Workers utility depends on wage AND risk of injury on the job U=f(wage, risk) Two jobs: high risk and low risk reservation price (risk premium) = wage premium over safe jobs that the worker needs to receive to be indifferent between risky and safe job (might be negative [risk lover])
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Supply of Workers to Risky Jobs The greater the premium, the higher the supply of workers that want a risky job =>Upward-sloping supply curve for risky labor
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Demand of Risky Workers Firms can invest in workplace safety or pay higher premium The higher the premium, the more they have incentive to invest in safety Downward-sloping demand for risky labor
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Equilibrium Number of Workers in Risky Job E * S P D w 1 - w 0 ( w 1 -w 0 ) *
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Negative Risk-Premium w 1 - w 0 ( w 1 -w 0 ) * 0 E * P Number of Workers in Risky Job S D N Δ w ^ MIN
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This note was uploaded on 11/17/2009 for the course ECON 339 taught by Professor Habermalz during the Spring '09 term at Northwestern.

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Lecture 6 Compensating Wage Differentials PDF -...

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