Ch.8COMPENSATINGWAGEDIFFERENTIALSAND.pptVIP

* * * * * * * * * Ch. 8: COMPENSATING WAGE DIFFERENTIALS AND LABOR MARKETS A compensating wage differential an increment in wages required to attract workers into a job with an undesirable working condition. Theory of Compensating differences. Assumptions on Employee Side. workers maximize utility. workers know job attributes and competing job offers. workers are mobile. Employee preferences Indifference curves to the NW represent higher levels of utility. A flatter indifference curve reflects a greater willingness to accept money to put up with additional risk (less risk averse) Assumptions on Employer Side. Firms maximize profits. Iso-profit curves show combinations of wage and risk that yield same profit. Iso-profit curves further to the SE represent higher levels of profits. A steeper iso-profit curve indicates that it is more costly to eliminate risk. OPTIMAL NEGOTIATIONS OVER WAGES AND RISK If the company and worker negotiate A, how could they both be made better off? If the company and worker negotiate B, how could they both be made better off? At what point will all the possible gains from negotiation be eliminated? MATCHING OF WORKERS AND FIRMS. A1, A2, B1, B2 represent worker indifference curves. X’ and Y’ represent zero profit iso-profit curves for firms X and Y (Recall: in competitive product markets, profits are always driven to zero since firms enter/exit whenever profits are positive/negative) How do workers A and B compare in terms of their attitude toward risk? How do firms X and Y compare in terms of their costs of eliminating risk? If both firms offer R’ (on zero profit line) Can firm X renegotiate a wage/risk contract that would leave their profits unchanged but be preferred to worker A? worker B? How would the contract differ? Can firm Y renegotiate a wage/risk contract that would leave their profits unchanged but be preferred to worker A? worker B? How would the contract differ? Which type of workers get matche