2. Compensating Wage Differentials Flashcards
What were the principal circumstances established by Adam smith?
- Agreeableness of employment
- The difficulty of learning the job
- Constancy of employment
- The trust reposed in those who exercise them
- The probability of success
What does a steeper utility curve of a worker between wage and risk indicate?
The steeper the curve, the more the workers needs to be compensated for taking more risk. AKA the more risk averse they are
What happens if the wage differential increases?
More workers enter risky jobs
Which firms have steeper iso profit curves?
Those which find it harder to reduce risk in the market place
What is the hedonic wage function?
It matches up firms and workers considering their preferences for risk and wages.
Why does the hedonic wage function work best for wage and risk?
Because there aren’t many other universally agreed on negative characteristics of work. Everyone agrees getting injured or dying is bad
What is the value of a statistical life?
The local trade off between fatality risk and money.
Problems with estimating VSL
•workers have different preferences, may thrive in different environments
•hard to measure firms and workers perceived risk
•injury is often self reported
•omitted variable bias
How may health and safety increase utility for workers?
•workers underestimate risk
•negative externalities associated with injury and death
•worker compensation programs encourage workers to accept too much risk
How can we remove ability bias?
Track individuals over time as they change job (panel data)
Issues with using panel data to prevent ability bias
•ability may still vary over time with experience
•attitudes to risk may change over time
•may not be much data if people don’t make many job changes or changes that don’t have different levels of risk
