ECON 139 SP 15 Antonovics 6 Thank you for supporting the Associated Students Lecture Notes Service by purchasing A S Lecture Notes In order to continue providing quality notes and services to you you can fill out our survey online at www tinyurl com ASLN Survey The survey will provide us with the feedback we need to improve our services and the quality of our notes A S Lecture Notes is in the process of hiring note takers for Fall Quarter 2015 Starting week 8 applications are available at the A S Lecture Notes Office or online at www lecturenotes ucsd edu I encourage you to apply for the note taker position or pass the word on to a friend Why should you be a note taker Note taking gives you the chance to meet and interact with professors It is also a great addition to your resume The hours are flexible meaning you can prepare your notes on your own time which is a definite bonus for the busy student lifestyle The position pays 10 00 hour which includes payment for class time and also the time it takes you to prepare your notes at home In order to be a note taker you must have a cumulative grade point average of at least a 3 0 Also upon being hired note takers must receive permission from the professor to take notes for his her class Please refer to the application for further information or e mail the A S Lecture Notes office at as lecturenotes ucsd edu Applications are due WEDNESDAY of FINALS WEEK by 5pm Thank you in advance for considering this worthwhile opportunity Sincerely Haleigh McVey Manager A S Lecture N ECON 139 SP 15 Antonovics 6 5 5 15 1 May 5 2015 Compensating Wage Differentials Not All Jobs Are Created Equal Risk of death or injury on the job Location Flexibility of hours Health benefits Pension plans Repetitiveness of tasks Weeks of vacation Risk of being laid off Compensating Wage Differentials Quick Summary Non wage job attributes matter Worker heterogeneity Workers may value different job attributes differently Firm heterogeneity Some firms may find it more costly to provide on the job benefits than others In equilibrium Wages will compensate workers for job attributes Firms and workers will match with each other so that firms that find it easy to provide amenities will match with workers who value those amenities the most highly Page 3 of 24 Model 1 Two Risk Levels Two types of jobs risk of injury 0 or risk of injury 1 Workers have complete information about risks Utility f w risk Compensating Wage Differentials Can think of w as a reservation price w is amount you have to bribe a worker to take the job with risk of injury 1 over the job with risk of injury 0 Heterogeneity in Preferences for Risk Page 4 of 24 Above chart means for example worker 1 has a low reservation price He She doesn t like the job very much and only need to be paid 1 As w increases the supply of workers to the risky job increases Heterogeneity in Cost of Reducing Risk Firms balance the cost of reducing the risk against the cost of paying workers w to work in the risky job Firms differ in how costly it is for them to reduce risk As w increases more firms will find it worthwhile to incur the cost of reducing the risk on the job Thus as w increases the demand for workers in the risky job decreases Page 5 of 24 As w increases the demand for workers in the risky job decreases The Market for Risky Jobs The workers in the risky jobs are most with the low reservation price they don t mind risk that much Firms with the highest cost of reducing risk stay risky w is determined by or reflects he risk preferences of marginal worker Negative Compensating Wage Differentials This will happen as long as there are some worker who like risk Page 6 of 24 Underlying Assumptions Wage differentials across industries and occupations will reflect the value of non wage job attributes if 1 Workers maximize utility not income 2 Workers have perfect information about all job characteristics 3 Sufficient labor mobility exists You can also think about favorable non wage job attributes Model 2 Many Jobs Suppose there are many types of jobs Firms and workers observe job characteristics and know their value We only observe the wages and job characteristics We would like to know the value of the characteristics For example how much do we have to pay for health benefits living in San Diego etc in the form of lower wages Individuals Positive relationship between risk and wages Page 7 of 24 Implicit in graph marginal disutility of risk is increasing Firms Firms differ along two dimension Page 8 of 24 Wages Level of risk Firms attract workers by Reducing risk Raising wages Both actions result in lower profits Isoprofits Isoprofits the combinations of wages and risk levels that result in a fixed level of profits Positive relationship between wages and risk Implicit in graph marginal cost of reducing risk is increasing 0 in long run Page 9 of 24 Page 10 of 24 Equilibrium This model predicts that as risk level increase wages increase It s a positive relationship Page 11 of 24 Example in equilibrium The green line cutting the curve implies that the blue firm is able to offer better benefits red Implications Workers that are more risk averse end up at firms where it is cheap to reduce risk and where equilibrium risk levels are low Workers that are less risk averse end up at firms where it is expensive to reduce risk and where equilibrium risk levels are high Matching With Many Types Page 12 of 24 Empirical Evidence on Compensating Wage Differentials Conflicting empirical evidence regarding compensating wage differentials Doesn t mean theory isn t valid recall that the observed compensating wage differential reflects the preferences of the marginal worker to accept that job Ability bias high ability will earn high wages and may take some of their compensation in the form of high benefit levels If you cannot control for ability which is hard to observe then you will see a positive correlation between wages and benefit levels in the data Mandated Safety and Health Regulations Occupational Safety and Health Act of 1970 OSHA Charged the U S Department of Labor with protecting health and safety of American labor force OSHA sets safety and health standards in the workplace Restrictions on dust and asbestos in air Fall protection at construction sites Noise control regulations ENORMOUSLY wide range of regulations Page 13 of 24 ECON 139 SP 15 Antonovics 6 5 7 15 14 May 7 2015 Why regulations may be bad Intuition Behind Why Regulation May