Compensating Wage Differentials,The model of competitive labor markets implies that as long as workers or firms can freely enter and exit the marketplace, there will be a single wage in the economy if all jobs are alike and all workers are alike.,All jobs are not the same. Adam Smith in 1776 argued that compensating wage differentials arise to compensate workers for the nonwage characteristics of jobs. It is not the wage that is equated across jobs in a competitive market, but the “whole of the advantages and disadvantages” of the job. Workers differ in their preferences for job characteristics and firms differ in the working conditions that they offer. The theory of compensating differentials tells a story of how workers and firms “match and mate” in the labor market.,各行業受雇員工每人每月平均薪資,資料來源:行政院主計處,1. Workers and Firms Choice with Risky Jobs,E.g. Employer X: NT.$100 per hour, clean, safe work conditions Employer Y: NT.$100 per hour, dirty, noisy factory Most workers would undoubtedly choose employer X. If employer Y decides not to alter working conditions, it must pay wage above NT.$100 to be competitive in the labor market. The extra wage it must pay to attract workers is called a compensating wage differential because the higher wage is paid to compensate workers for the undesirable working conditions. After the wage rise of firm Y, if both firms could obtain the quantity and quality of works they wanted, the wage differential would be an equilibrium differential, in the sense that there be no forces causing the differential to change.,* The compensating wage differential serves two purposes:,It serves a social need by giving people an incentive to voluntarily do dirty, dangerous, or unpleasant work or a financial penalty on employers offering unfavorable working conditions. At an individual level, it serves as a reward to workers who accept unpleasant jobs by paying them more than comparable workers in more pleasant jobs. Those who opt for more pleasant conditions have to buy them by accepting lower pay., Compensating wage differentials provide the key to the valuation of the nonpecuniary aspects of employment. Note: The predicted outcome of the compensating wage differential theory of job choice is not that employees working under “bad” conditions receive more than those working in “good” conditions. The prediction is that, holding worker characteristics constant, employees in bad jobs receive higher wages than those working under more pleasant conditions.,* The compensating wage differential theory is based on three assumptions:,Utility Maximization Workers seek to maximize their utility, not their income. Compensating wage differentials will only arise if some people do not choose the highest-paying job offered, preferring instead a lower-paying but more pleasant job. Wages do not equalize in this case. The net advantage the overall utility from the pay and the psychic aspects of the job tend to equalize for the marginal workers.,2. Worker Information Workers are aware of the job characteristics of potential importance to them. Company offering a “bad” job with no compensating wage differential would have trouble recruiting or retaining workers, trouble that would eventually force it to raise its wage. Note: Our predictions about compensating wage differentials hold only for job characteristics that workers know about. 3. Workers Mobility Workers have a range of job offers from which to choose. It is the act of choosing safe jobs over dangerous ones that forces employers offering dangerous work to raise wages.,2. The Hedonic Wage Function,A wage theory based on the assumption of philosophical hedonism that workers strive to maximize utility. To simplify our discussion, we shall analyze just one dimension risk of injury on the job and assume that the compensating wage differentials for every other dimension have already been established. To obtain a complete understanding of the job selection process and the outcomes of that process, it is necessary to consider both the employer and employee sides of the market.,(1) Employee Considerations,Some combinations of wage rates and risk levels that would yield the same level of utility can be represented by indifference curve map.,W,Risk,U1,U2,U3,U2 slopes upward because risk of injury is a “bad” job characteristics. i.e., if risk increases, wage must rise if utility is to be held constant.,W,Risk,Highly Averse to Risk,Moderately Averse to Risk,UL,UH,People differ in their aversion to the risk of being injured. Those who are very sensitive to this risk will require large wage increases for any increase in risk (UH), while those who are less sensitive will require smaller wage increases to hold utility constant (UL).,(2) Employer Considerations,Assumptions: It is presumably costly to reduce the risk of injury facing employees. Perfect competition Firms operate at zero profits. All other job characteristics are presumably given