Lecture 12 - Lecture 12 Lecture 12 Theory of Compensating...

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ecture 12 Lecture 12 Theory of Compensating Differentials (The Worker Side)
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oadmap Roadmap orker utility for wage and job attributes Worker utility for wage and job attributes. • Worker sorting by job attributes. • Hedonic Wage Theory • Problem
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heory of Compensating Differentials Theory of Compensating Differentials hy do some jobs with the same function Why do some jobs with the same function pay more than others? hy do similar firms provide different • Why do similar firms provide different types of jobs? • How does it all fit together?
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efinition Definition compensating differential which is also A compensating differential , which is also called a compensating wage differential r an qualizing difference is defined as or an equalizing difference , is defined as the additional amount of income that a iven worker must be offered in order to given worker must be offered in order to motivate them to accept a given ndesirable job relative to other jobs that undesirable job, relative to other jobs that worker could perform.
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Equilibrium In Equilibrium o worker prefers to work at a different job No worker prefers to work at a different job with higher/lower pay and a worse/better ork environment work environment. • No firm can make more profit by paying a high/lower wage and providing a worse/better work environment.
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Worker Utility (simple case: all workers have the same preferences) uppose there are two types of firms, dirty Suppose there are two types of firms, dirty and clean. orkers like cleanliness and money. Workers like cleanliness and money. • All else equal, workers prefer more oney, and workers prefer less dirt (or money, and workers prefer less dirt (or more cleanliness). • What does this imply about the lationship between wages and dirtiness? relationship between wages and dirtiness?
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lustration (two goods case) Illustration (two goods case) Person is indifferent between hese two points but must be These two points, but must be compensated for more dirt with more money. Utility is increasing in cleanliness and money We like both money and cleanliness
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uestions Questions an dirty firms offer a wage lower than W Can dirty firms offer a wage lower than W (dirty)? Why or why not? ould dirty firms offer a wage higher than • Would dirty firms offer a wage higher than W (dirty)? Why or why not?
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This note was uploaded on 01/09/2010 for the course ILRLE 2400 at Cornell University (Engineering School).

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Lecture 12 - Lecture 12 Lecture 12 Theory of Compensating...

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