Compensating Wage Differential

Question 1

What are the two parts of the job

Answer 1

1. the worker’s value of marginal product - how much the worker is producing
2. the price paid for attributes of the job - compensating wage differential

Question 2

What is the compensating wage differential?

Answer 2

The price paid for attributes of the job

Question 3

What do workers want?

Answer 3

High wage and low danger

Question 4

When will workers except a riskier job?

Answer 4

If they are paid more

Question 5

What does U(w,0) > U(w,1) mean?

Answer 5

workers prefer safer jobs

Question 6

What are we assuming?

Answer 6

• Competitive labour market
• jobs differ in their level of safety (D=0 - safe job) (D = 1 - dangerous job)
• workers maximise utility
• all workers are equally productive - constant marginal product.
• workers know which jobs are safe/risky in advance

Question 7

What is w*?

Answer 7

The wage where U(w0,0) = U(w*,1)

Question 8

What is Z?

Answer 8

Z = w* - w0, Z is the compensating differential for the worker.
- Z is the increase that is necessary for a worker to accept a risky job over a safe job

Question 9

The worker excepts the job where D=1 if W is greater than/less than Z?

Answer 9

W>Z

Question 10

The worker accepts the job where D=0 when W is greater than/less than Z?

Answer 10

W<Z

Question 11

Given concerns about ability and selection bias, how can we estimate returns of schooling?

Question 12

Indifference curve - utility for W and probability of injury

Answer 12

The steeper the curve the curve the more risk averse - more distaste for risk

Question 13

Why are iso-profit curves upward sloping?

Answer 13

it costs money to produce safety

Question 14

Why are Iso-profit curves are concave?

Answer 14

Law of diminishing marginal returns for safety

Question 15

What are the properties of iso-profit curves?

Answer 15

1. Upward sloping
2. Firms want low wage and high risk
3. Concave
   -> Iso-profit curves for different firms can intersect
   -> Assume firms differ in their ability to produce safe jobs

Question 16

What odes iso-profit curves show?

Answer 16

All the risk-wage combinations that yield the same profit

Question 17

Jobs with a higher risk of injury has what type of safety costs and what wages?

Answer 17

-> Lower safety costs
-> Higher wages

Question 18

What does the hedonic wage function show?

Answer 18

the market price from an attribute e.g., Risk
-> Total wage will be the sum of the worker’s marginal product and the price of all the attributes of the job
-> it isn’t always linear

Question 19

What is the value of a statistical life?

Answer 19

is what workers would pay, on average, to save one life