Topic 6: Wage Differencials

Question 1

What is hedonic pricing?

Answer 1

Where a good is sold with many characteristics and only the price of the whole unit, not of those indervidual characteristics can be observed. An example is jobs, where wage reflects the value of work done, the risk of injury, job satisfaction and many other factors

Question 2

Why must compensating wage differencials exist?

Answer 2

Because competing employees for labour must compensate for their relative risk in order to maximise profits. With equal wages, risk free firms could pay lower wages without losing many workers, and risky firms would have trouble maintaining a workforce, all of them deseperate for the risk free job that pays the same but is risk free

Question 3

What are the conditions for compensating wage differencials?

Answer 3

• Workers maximise utility, not income
• Workers all have the same, or similar information on jobs
• no barriers to mobility

Question 4

What are two characteristics of jobs that will cause wage differencials?

Answer 4

• risk of injury (negative aspect)

- job benifits (positive aspect)

Question 5

Draw risk-wage indifference curves for 2 inderviduals, one more adverse then the other

Answer 5

x

Question 6

Draw some iso profit curves for a firms risk-wage tradeoff

Answer 6

x

Question 7

In the Wage compensation model, why are indifference & isoprofit curves concave?

Answer 7

Because a) when there is lots of risk, decreases to risk are more valuable then when there is little risk. b) Diminishing return to risk reduction. Giving your workers hard hat’s and reinforcing mines might half your risk of worker injury, not to expensive. To half it again, you might need to have everything done by mechatronic robots - very expensive.

Question 8

Show a graph illistrating wage differencials for employee benifits, before and after a tax break for employee provided insurance

Answer 8

x

Question 9

Why is there a principal-agent problem in labour hiring?

Answer 9

Because putting in effort to work likely causes disutility, and effect can be difficult to measure So workers may put little effort in. After some time the employer may be able to figure out the worker is slake. But when they fire them, they can simply move on to the next firm, earn the same market wage and do the exact same thing, while the firm loses human capital.

Question 10

How does efficiency wages tackle the principal agent problemin labour markets?

Answer 10

• Higher wages means larger pool of applicants for vancancies
• higher wages means higher cost for the worker losing their job, so they might try more
• lower sense of inequality, better moral