ec350Chp8 - Compensating wage differentials l Matching of...

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Compensating wage differentials Matching of workers between workers (trying to max utility) and employers (trying to max profit) some jobs are preferred to others at the same wage so if you cannot force workers to do the less preferred jobs, then you must provide incentives for people to do them
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Compensating wage differentials Compensating wage differentials act as a individual rewards to workers who accept “bad” or arduous jobs compensating wage differentials then become the price at which good working conditions can be bought or bad working conditions sold to workers Manufacturing production employees earn 3% ($725) more for working nights…
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Compensating wage differentials Example 8.1 (page 251) Bottomline: if a worker has the choice between a “good” job and a “bad” job at the same wage then he/she will choose the “good” job So he/she must be provided with additional incentives (monetary or otherwise) to undertake the “bad” job So holding worker characteristics constant, workers in “bad” jobs will get paid more than those in “good” jobs
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Compensating wage differentials What are those characteristics? Sill level, age, experience, race, gender, union status, region of the country and so forth. Three assumptions: (1) Utility maximization (2) Worker information (3) Worker mobility
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Compensating wage differentials (1) says that workers are interested in maximizing their utility and not merely income. If workers always chose to maximize their income then they would always choose the highest paying job available This behavior would then would cause wages to be equalized across jobs open to any set of workers
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Compensating wage differentials Continuing with (1) utility maximization In contrast compensating wage differentials would arise only if workers do NOT choose the highest paying job offered but instead prefer a low paying but more “pleasant” job. This behavior allows employers paying lower wages for more pleasant jobs to be competitive Overall utility from the pay and the psychic aspects of the job tend to equalize for the marginal worker
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Compensating wage differentials (2) The assumption on worker information says that workers are fully informed about the characteristics of the job Or the workers find out about the hazards of a “bad” job by word of mouth or soon after joining etc. If the “hazard” is an obscure one such as long term impacts on health then we may not perceive any compensating wage differentials and our predictions may not be correct
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Compensating wage differentials (3) Worker mobility Workers have a range of jobs to choose from This would require some degree of mobility on the part of the workers.
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