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UCSD ECON 139 - ECON 139 set 6

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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 encourageyou 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 [email protected] Applications are due WEDNESDAY of FINALS WEEK by 5pm! Thank you in advance for considering this worthwhile opportunity.Sincerely,Haleigh McVeyManager, A.S. Lecture N ECON 139 SP ‘15 Antonovics 6May 5, 2015Compensating Wage DifferentialsNot 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. ECON 139 SP ‘15 Antonovics 6 5-5-15 1Compensating 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 24Model 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 Δw as a reservation price. • Δw 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 RiskPage 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 $1As Δw 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 Δw to work in the risky job. • Firms differ in how costly it is for them to reduce risk. • As Δw increases, more firms will find it worthwhile to incur the cost of reducing the risk on thejob. • Thus, as Δw increases, the demand for workers in the risky job decreases.Page 5 of 24• As Δw 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-Δw* is determined by or reflects he risk preferences of marginal worker.Negative Compensating Wage DifferentialsThis will happen as long as there are some worker who like risk. Page 6 of 24Underlying 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. - π=0 in long run.Page 9 of 24Page 10 of 24EquilibriumThis model predicts that as risk level increase, wages increase. It’s a positive relationship.Page 11 of 24Example in equilibriumThe green line cutting the redcurve implies that the bluefirm is able to offer betterbenefits. 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 TypesPage 12 of 24Empirical 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


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