CompensatingWageDifferentials-power point

# CompensatingWageDifferentials-power point - Compensating...

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Compensating  wage differentials It’s just a job. Grass grows,  birds fly, waves pound the sand.  I beat people up.  - Mohammad Ali

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Introduction Adam Smith (The Wealth of Nations, 1976):  The  whole of the advantages and disadvantages of different employment of labour and stock  must, in some neighbourhood, be either perfectly equal or continually  tending  to  equality.  If  in  the  same neighbourhood  there  was  any  employment  either evidently more or less advantageous than the rest, so many people would crowd into it in the one case, and so  many  desert  it  in  the  other,  that  its  advantages would soon return to the level of other employments.
Indifference Curves Relating the Wage  and the Probability of Injury on Job w 1 1 ˆ w U 1 Wage 1 0 Probability of Injury w 0 Q P U 0 w ^ U 1 The worker earns a wage of w 0 dollars and gets U 0 utils if she chooses the safe job. She would prefer the safe job if the risky job paid a wage of dollars, but would prefer the risky job if that job paid a wage of dollars. The worker is indifferent between the two jobs if the risky job pays w^ 1. The worker’s reservation price is then given by D w^ = w^ 1 - w 0.

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The Market for Risky Jobs Workers care about whether their job is safe  or risky Utility = f(w, risk of injury) Indifference curves reveal the trade offs that  a worker prefers between wages and  riskiness Firms may have a risky work environment  because it is less expensive to pay higher  wages than to make the environment safe
Determining the Market  Compensating Differential   The supply curve slopes up  because as the wage gap  between the risky job and  the safe job increases, more  and more workers are  willing to work in the risky

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CompensatingWageDifferentials-power point - Compensating...

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