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M. Chaitanya
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Assume that the wage of $10 in submarket a is higher than the wage in other submarkets. Assuming that jobs and workers are homogenous and information and mobility is costless, workers will leave the other submarkets for higher paying submarket a.
This will decrease the labor supply in the other submarkets and increase the labor supply in submarket a (S0 to S1). The equilibrium wage rate will decrease in submarket a and rise in the other submarkets until the wage rate is the same in all submarkets ($8).
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D0a
Q0 Q1
13.73
10.96 9.81
Services
Retail Trade
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16.53
13.21
Hourly Wage
$23.13 22.91 21.44 19.09
Pennsylvania
Ohio Texas Arkansas Mississippi
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18.26
18.12 17.53 14.77 13.80
Compensating Differentials
Compensating wage differentials consist of extra pay that an employer must provide a worker for some undesirable job characteristic that does not exist in alternative employment.
The
wage differential is caused by a decreased labor supply for the job that has the undesirable job characteristic and an increased labor supply for the alternative employment.
Compensating Differentials
Riskier
Fringe
Jobs
benefits
Job
status
Jobs
Compensating Differentials
Job
location
Cities
with greater amenities pay lower wages. Cities with greater cost of living pay higher nominal wages.
Job
security
Jobs
Prospect
Jobs
of wage advancement
Compensating Differentials
Extent
Jobs
with less personal control over the workplace and less flexible work hours pay higher wages.
Jobs that require more education and training will pay a higher wage rate than those that do not.
The
wage difference between skilled and unskilled workers is called the skill differential.
Skill differentials can increase, decrease, or reverse wage differences caused by compensating differentials.
Example:
diggers
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Shirking model
Firms
will pay above-market wages where it is costly to monitor employee performance or the employers cost of poor performance is high. will pay above-market wages when hiring and training costs are high. is mixed empirical evidence.
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Turnover model
Firms
Empirical evidence
There
Union status
Union
Discrimination
Discrimination
against women and minorities exists in some markets and creates wage differentials.
Firm size
Large
firms are more likely to be unionized. Workers at large firms may be more productive
Training, better workers, greater capital
Higher
NonCompeting Groups
Individuals differ in the type, amount, and quality of their human capital.
The
result is the labor force consists of noncompeting groups of workers that are not easily substitutable for each other. In the short run, these differences in human capital generate wage differentials. In the long run, the wage differentials cause individuals to move to higher paying jobs to some extent.
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Differing Preferences
who are presented-oriented (i.e., have a high discount rate) are not willing to sacrifice present consumption without a large increase in future income. Persons who are future-oriented (i.e., have a high discount rate) are willing to sacrifice present consumption for a small increase in future income. Persons with lower discount rates acquire more human capital and thus create wage differentials.
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Differing Prefences
have different preferences for job security, location, and risk. These differences in preferences create wage differentials
Married males earn 8 to 40% more than single males. Possible explanations:
Differing
personal attributes.
Characteristics
such as personality and reliability enhance the probability of being married and also increase ones wage.
Greater
capital.
Need
Face
Mixed evidence
One
Other
studies find that differing personal attributes explain the wage differential.
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Indifference Map
The hedonic indifference map is composed of a number of indifference curves. Each individual curve shows the various combinations of wage rates and a particular nonwage amenity (for example job safety) that yield a specific level of total utility. Each curve to the northeast reflects a higher level of total utility. A steep curve implies that the person is risk averseit takes a large increase in the wage rate to compensate for a small reduction in job safety. Wage Rate
I1
I2
I3
Isoprofit Curve
The employers isoprofit curve shows the various combinations Wage Rate of wage rates and a particular nonwage amenity (for example job safety) that yield a given level of total profit. The isoprofit curve gets steeper with higher levels of job safety since it gets more and more expensive to increase job safety. Competition among firms will result in only normal profits (zero economic profit) in the long run. Firms will have to make their wage rate-job amenity decisions along a curve such as P. Firms differ in their ability to increase job safety and thus have different isoprofit curves.
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Matching
The slope of isoprofit curve PA is less steep than curve PB,which implies the marginal cost of job Wage Rate safety is more expensive at firm B than at firm A. Indifference curve IA is steeper WB than curve IB which implies that person A is more risk averse than person B. Workers maximize utility by WA being tangent to the highest possible isoprofit curve. The risk averse worker will work for the firm able to raise safety at low marginal cost. The worker will get wage WA and safety SA. The risk loving worker will work for the firm able to raise safety at high marginal cost. The worker will get wage WB and safety SB.
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IB
A
PB
IA PA SB SA
Nonwage amenity (job safety)
Workers with fewer nonwage amenities will get higher wages. Laws with minimum safety standards may reduce utility of some workers.
Risk
Part of the male-female wage differential may reflect differences in preferences for nonwage amenities.
Women
Workers with strong preferences for fringe benefits will match up with firms that can provide fringe benefits at low cost.
Cafeteria
plans which allow workers to choose from a variety of fringe benefits allow workers to get higher utility since they are not forced to accept a fixed bundle.
8% 5%
Wage Rate
W0 W2 We W1 W3
We
Units of Time
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Immobilities
Labor immobilities are impediments to the movement of labor and can cause wage differentials. Geographic immobilties
Costs
to moving can deter migration and thus permit wage differentials to exist across geographic areas. on mobility imposed by the government or unions can deter mobility.
Occupational
Institutional immobilties
Restrictions
licensing, apprenticeships
Immobilities
Sociological immobilties
Race
and gender discrimination will cause racial and gender wage differentials to exist.
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