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Intermediate Microeconomics


4. Compensating Wage Differentials


In reality, workers are paid different wages. In part, the different wages received are due to their skills and preferences. Some workers are engineers, while others are laborers. Some workers prefer to do their work outdoors, while others prefer to sit behind a desk. Some workers have strong preferences for the geographic location of their job, while others have little or no preference for a particular city, state, or country. While workers differ in their characteristics and preferences, jobs also differ in their characteristics. Some jobs are risky, safe, physically demanding, and involve performing repetitive tasks. Compensating wage differentials are effectively compenstation for nonwage aspects of a job. For example, firms offering unpleasant working conditions may compensate workers in some way, perhaps with a higher wage, for the unpleasantness of the job. The theory of compensating wage differentials posits that the allocation of labor is not the result of random sorting, which is the case in the competitive model. Instead the theory of compensating wage differentials contends that it matters which workers work for particular firms.


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Wages and Risk of Injury

This Pencast illustrates that a compensating differential must be paid to a worker to leave them indifferent between taking a safe job versus a risky job. [Play Pencast]


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Risk Preferences and Reservation Prices

This Pencast shows that different degrees of risk aversion require that employers pay some workers more and others less to accept a risky job over a safe one. [Play Pencast]


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Supply Curve for Risky Jobs

This Pencast discusses and illustrates the willingness of workers to supply their labor to risky jobs. [Play Pencast]


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Demand Curve for Risky Jobs

This Pencast discusses and illustrates employers' demand for providing risky work environments. [Play Pencast]


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Equilibrium in the Market for Risky Jobs

This Pencast demonstrates how equilibrium is reached in the market for risky jobs. [Play Pencast]


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Equilibrium When Some Workers Prefer Risk

This Pencast shows a situation in which the compensating differential required to induce a worker to take a risky job is negative. [Play Pencast]


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Indifference Curves of Different Workers

This Pencast illustrates three different types of indifferences cruves, each of which represent risk-averse workers. However, the workers differ in their degree of risk aversion. [Play Pencast]


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Equilibrium: Matching Workers and Employers

This Pencast illustrates how workers with different risk preferences match with firms that provides work environments that are more and less risky. [Play Pencast]


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Safety Regulations: Example I

This Pencast shows how public policies designed to make workplaces safer affect the well-being of workers and the profits earned by firms. It is assumed that workers and firms know the risk of injury with certainty. [Play Pencast]


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Safety Regulations: Example II

This Pencast shows how public policies designed to make workplaces safer affect the well-being of workers and the profits earned by firms. It is assumed that firms know the risk of injury with certainty, but that workers underestimate such risks. [Play Pencast]


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