12 Compensating%20Wage%20Diffs%202 - LECTURE 12...

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LECTURE 12 COMPENSATING WAGE DIFFERENTIALS 2
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LAST TIME Not all jobs are equal Two types: Safe ( ρ =0) and Risky ( ρ = ) Distribution of preferences over risk Distribution of the cost of providing a safe job by firms ρ Tolerance for Risk Cost of providing safe job Fraction of workers Fraction of jobs at firms
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LABOR MARKET FOR RISKY JOBS: EQUILIBRIUM DETERMINES EMPLOYMENT AND COMP. WAGE DIFF. w r - w s # of workers in risky jobs Δ w* S D E r * High cost of safety – Offer risky jobs High risk tolerance – Work in risky jobs Low cost of safety – Offer safe jobs Low tolerance for risk – Work in safe jobs
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ALLOCATION OF WORKERS TO JOBS IN EQUILIBRIUM Tolerance for Risk Cost of providing safe job Fraction of workers Fraction of jobs at firms
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COMPENSATING WAGE DIFFERENTIAL It is the wage premium paid to those working in the less desirable job It is such that for the marginal worker g G,± = g(G,³)
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EMPIRICAL EXAMPLE: SEX WORKERS Two options: SAFE: Use condom RISKY: Do not use condom If sex workers are risk averse, prefer protected sex all else equal It is not costly to provide a safe environment (condoms are cheap), but client may prefer unprotected sex
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LABOR MARKET FOR UNPROTECTED SEX w r - w s # do not use condom Δ w* S D E r *
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2 STUDIES Gertler, Shah, Bartozzi (2005) Estimate wage differential for protected vs. unprotected Idea: Look at price of transaction w/ and w/o condom Survey sex workers in two states in Mexico, panel data 84% use condoms every time, 23% premium for no condom Risk HIV low – 0.35% of sex workers infected, 0.128% of clients Rao, Gupta, Lokshin, Jana Sex workers in Calcutta 1992 Education program – aware of HIV risks Safe sex price is 70% lower
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HEDONIC WAGE FUNCTION Not just “Risky” and “Safe” jobs There is a range of ρ possible for a job
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This note was uploaded on 01/19/2011 for the course ECON ECON 440 taught by Professor Kristinebrown during the Fall '10 term at University of Illinois at Urbana–Champaign.

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12 Compensating%20Wage%20Diffs%202 - LECTURE 12...

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