Compensating differentials
What could make workers demand different wages for different types of jobs?
Working conditions, amenities and preferences
When does a firm demand workers in a risky environment?
When it is cheaper to pay the compensating differential than providing a safe environment.
(pMPr-pMPs)>w1-w0
The marginal gain in revenue for not offering a safe environment compensates for the higher wage that has to be paid
What is the equilibrium wage differential for risky jobs?
The dislike for risk of the marginal worker employed in a risky job
What is the hedonic wage function?
When firms can offer differenc combinations of risk and wages, the risk and wages combinations that are actually chosen
Joins all the points in which IC and Isoprofit curves are tangent
Its slope measures workers' reservation prices
What is the skill bias puzzle? Why does it happen?
It is the fact that CWD's shrink substantially or even become insignificant in panel regressions.
It might happen because of imperfect information about job risk, heterogeneity in workers preferences or monopsony power
Which are the empirical strategies for estimating compensating wage differentials? (and its downsides)
Cross-sectional wage regressions -> ability bias
Panel regressions -> skill bias puzzle (often insignificant CWD because of assymetric information, heterogeneity or monopsony power)
Matched employer and employee regressions
Survey data and hypothetical choice -> external validity, selection of the sample, behavioural biases
What is the effect of income taxation on CWD?
If labour is fully mobile, workers will move to jobs with more amenities, so it will adjust
If labour is not fully mobile, workers with less amenities will be worse off
Empirically, a 10% increase in taxes makes individuals move to 0.33% better paying jobs -> barriers to worker mobility or low valuation of amenities