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Compensating Wage Differentials

Compensating Wage Differentials. Compensating Wage Differentials. Utility, not wages, should be equalized across jobs in a perf. competitive market. Utility is affected by hardship, risk of injury, risk of layoff, working with people, etc. Affects occupations, regions, countries,...

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Compensating Wage Differentials

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  1. Compensating Wage Differentials

  2. Compensating Wage Differentials • Utility, not wages, should be equalized across jobs in a perf. competitive market. • Utility is affected by hardship, risk of injury, risk of layoff, working with people, etc. • Affects occupations, regions, countries,... • Basic idea from Adam Smith, book 1, chapter 10 of Wealth of Nations. • Hedonic model of Rosen (1974)

  3. Basic Model • Equally productive workers are mobile (across regions, occupations, firms, etc.) • Marginal worker has perfect information. • What is the necessary consumption that would compensate me (in terms of utility) for working in a noisy job? • Firm side, equilibrium. • Estimate hedonic (reduced-form) equation.

  4. Equalizing Wage Differential for Workplace Safety (β3) • ln(wij) = β0 + β1∙Xi + β2 ∙Zj + β3 ∙ riskj + εij • How to measure risk? • Self-reported? Problem if workers differ in perception and ability to deal with risk. • Industry- or occupation-wide accident rate? Disregards workers heterogeneity. • Worker unobservables affect not only wage but also their own risk (Shogren & Stamland JPE 2002): how tolerant / able to cope with risk?)

  5. Workplace Safety and Equalizing Wage Differentials • Simple regressions often give wrong ‘sign’. • Solution to this endogeneity? • Use switchers to eliminate time-constant workers’ characteristics (But: are switchers random? IV for switching jobs (plant closure)). • Use a proxy for the unobservables. (Viscusi & Hersch, REStat 2001: Smokers select riskier jobs, get injured more and get lower comp. for risk of injury. Labor markets are segmented.)

  6. An example: Night-WorkingUK LFS

  7. Some related applications • VSL: Ashenfelter &Greenstone: road safety • Wage curve studies: how do regional wages react to regional unemployment? • Cross-section (steady state comparisons): Compensate workers for higher risk of job loss (higher unemployment rate): β>0 • Time differences (Wrt -Wrt-1=β (Urt -Urt-1)+…): Regional equilibration: lower wages when unempl. goes up to support job creation: β<0

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