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RevisedCh8Notes - Chapter8: wage,. acrossindividuals(

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Chapter 8: Compensating Wage Differentials While the discussion in Chapters 1 to 7 emphasized that everyone in the labour market is paid the same  wage, wages clearly vary across individuals. This chapter develops the tools to show why wages can differ  across individuals (even if everyone is equally productive) when the labour market comprises sub-markets  that are integrated into a single, more broadly defined labour market. Wages structures, the relative prices of labour, are utilized to allocate labour to its most productive use and  to encourage human capital development (such as education) into areas yielding the highest return. In addition, higher wage rates compensate workers for undesirable job characteristics and ensure the  equality of supply and demand for such (undesirable) jobs. Theory of Compensating Wages The idea of compensating wage differentials can be traced back to the writings of Adam Smith: "the  agreeableness or disagreeableness of the employment themselves... make up for a small pecuniary gain in  some employments." for additional information about Adam Smith, click on: http://www.adamsmith.org/ Higher wage rates compensate workers for undesirable working conditions, such as an unsafe or unhealthy  work environment or undesirable working hours (the midnight shift), and for incurring additional costs of  employment. wages will be higher for some individuals to compensate them for doing unpleasant jobs, while  others will willingly accept a lower wage for jobs with more amenities Workplace safety can be used to illustrate the theory of compensating wage differentials; the risk of injury or  illness that can result form an unsafe or unhealthy work environment gives rise to compensating wage  differentials. Firms can choose their production technology to offer workers greater safety or they can economize on  safety and offer the savings to workers in the form of higher wages; for any firm, there will generally be a  tradeoff in offering more safety or higher wages, holding constant the level of profits Textbook Figure 8.1(a) illustrates a single firm's isoprofit schedule showing various combinations of  wages and safety that the firm can offer and maintain the same level of profit
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