COMPENSATINGWAGEDIFFERENTIALS.pptVIP

(3) THE MATCHING OF EMPLOYER AND EMPLOYEES Graphing worker indifference curves and employer isoprofit curves together can show which workers choose which offers. A’s choice: (WAX, RAX) → value safety higher If A took B’s offer → A1 A2 B’s choice: (WBY, RBY) W Risk WBY WAX RAX RBY A1 B1 A2 B2 X X’ Y Y’ * Since X can produce safety more cheaply than Y, X will be a low-risk producer who attracts employees, like A, who value safety highly. Y attracts people like B, who have a relatively strong preference for money wages and a relatively weak preference for safety. Note: The only offers of jobs to workers with a chance of being accepted lie along XR’Y’. → The curve XR’Y’ can be called an “offer curve”, because only along XR’Y’ will offers employers can afford to make be potentially acceptable to employees. * The more types of firms there are in a market, the smoother this offer curve will be. It will always slope upward because of our assumptions that risk is costly to reduce and that employees must be paid higher wages to keep their utility constant if risk is increased. W Risk Offer Curve * HEDONIC WAGE THEORY Workers maximize utility by choosing wage-risk combinations that offer them the greatest amount of utility. Isoprofit curves are upward sloping because production of safety is costly. Isoprofit curves are concave because production of safety is subject to the law of diminishing returns. Hedonic wage functions reflect the relationship between wages and job characteristics. * THE HEDONIC WAGE FUNCTION UC UB UA Wage Probability of Injury pZ pY pX PC PB PA Hedonic Wage Function Different firms have different isoprofit curves and different workers have different indifference curves. The labor market marries workers who dislike risk (such as worker A) with firms that find it easy to provide a safe environment (like firm X); and workers who do not mind risk very much (worker C) with firms that find it difficult to provide a safe environment (firm Z). The observe