otvet - 4. A recent article stated, Workers in low-wage...

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4. A recent article stated, “Workers in low-wage jobs lack the basic security, the health benefits, and the flexibility in their work lives that most American workers take for granted.” Assuming this statement is true, do these facts contradict the theory of compensating wage differentials? Answer: The theory of compensating differentials predicts that, other things equal, jobs with low non-wage benefits would have to pay higher wages. This statement is implicitly comparing those in low-skilled jobs with those in high-skilled jobs, where clearly “other things” are not comparable. Thus, the facts in this statement do not contradict the theory of compensating wage differentials. 2. Consider the conditions of work in perfume factories. In New York perfume factories, workers dislike the smell of perfume, while in California workers appreciate the smell of perfume, provided that the level does not climb above S*. (If it rises above S*, they start to dislike it.) Suppose that there is no cost for firms to reduce or eliminate the smell of perfume in perfume factories and assume that the workers have an alternative wage, W*. Draw a diagram using isocost and indifference curves that depicts the situation. (The New York and California isocost curves are the same, but their indifference curves differ.) What level of perfume smell is there in the New York factories? In the California factories? Is there a wage differential between the California and New York workers? Answer: See the figure below. The California workers are paid exactly the same as the
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This note was uploaded on 12/20/2009 for the course ECO 112 taught by Professor Vasin during the Spring '09 term at American College of Gastroenterology.

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otvet - 4. A recent article stated, Workers in low-wage...

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