Job Matching & Labor Economics PDF

11/23/2024 Job Matching: The Role of Worker Preferences and Information Labor Economics...

11/23/2024 Job Matching: The Role of Worker Preferences and Information Labor Economics COMPENSATING WAGE DIFFERENTIALS AND LABOR MARKETS Employee Employer INSTRUCTOR: Matching is a formidable task because workers have varying skills and MARIA CORAZON B. ALBAÑO preferences and because employers offer jobs that differ in requirements and working environment. Job Matching: The Role of Worker Preferences Individual Choice and Its Outcomes and Information Suppose several unskilled workers have received offers from 2 employers. The assumption that workers are attempting to maximize utility implies that they are interested in both the pecuniary and the nonpecuniary aspects of their jobs. OR Higher compensation Pay is not all that matters; occupational tasks and how EMPLOYER X EMPLOYER Y levels in a job (holding job workers’ preferences mesh with tasks constant) would those tasks are critical - pays 50 per hour - pays 50 per hour attract more workers to it. elements in the matching - offers employment in clean, - offers employment in dirty, process safe working conditions noisy factory The focus of this discussion is on how the labor market Which employer would the workers choose? accommodates worker preferences Most would undoubtedly choose employer X because the pay is the same while the job is performed under more agreeable conditions. Clearly, however, P50 per hour is NOT an equilibrium wage in both firms. Suppose FIRM Y raises its wage FIRM Y must clean up the OR plant, pay higher wages, or do offer to P60 per hour while the FIRM X finds it easy to both if it wants to fill its offer from X remains at P50. attract applicants at vacancies. EMPLOYER X EMPLOYER Y P50 per hour, it will hold Assuming it decides not to Will this P10-per-hour differential - pays 50 per hour - from P50 to P60 per hour the line on any future alter working conditions, it - offers employment in clean, attract all the workers in our wage increases. must pay a wage ABOVE P50 - offers employment in to be competitive in the labor safe working conditions dirty, noisy factory group to FIRM Y? market. The higher wage in FIRM Y would attract only some of the group to firm Y. The extra wage it must pay to attract workers is called COMPENSATING  Some people are not bothered much by dirt and noise, and they may decide to take WAGE DIFFERENTIAL because the higher wage is paid to compensate the extra pay and put up with the poorer working conditions. workers for the undesirable working conditions. If such a differential did not  Those who are very sensitive to noise or dust my decide that they would rather be exist, firm Y could not attract the unskilled workers that firm X can obtain. paid less than expose themselves to such working conditions. 1  11/23/2024 Assumptions and Predictions The desire of workers to avoid unpleasantness or risk, then, should force employers offering unpleasant or risky jobs to The predicted outcome of job choice is pay higher wages than they would otherwise have to pay NOT simply that employees working under “bad” conditions receive more than those Wage differential serves 2 related, socially desirable working under “good” conditions. ends. 1. It serves a social need by giving people an incentive to voluntarily do dirty, dangerous, or unpleasant The prediction is that, holding worker work. characteristics constant, employees in bad 2.At an individual level, it serves as a reward to workers working conditions receive higher wages than who accept unpleasant jobs by paying them more those working under more pleasant conditions. than comparable workers in more pleasant jobs. (3 assumptions have been used to arrive at this prediction) Assumption#1: Utility Maximization Assumption#2: Worker Information Workers seek to maximize their UTILITY, not their income Workers are aware of the job characteristics of potential importance to them Compensating wage differentials will arise only if some people do not choose the highest– paying job offered, A company offering a “bad” job with no compensating preferring instead a lower-paying but more pleasant job. wage differential would have trouble recruiting or retaining workers – trouble that would eventually force it to raise its This behavior allows those employers offering lower- paying, pleasant jobs to be competitive. wage. The net advantages – the overall utility from the pay and the psychic aspects of the job – tend to equalize for the marginal worker. Assumption#3: Worker Mobility Hedonic Wage Theory and the Risk of Injury - refers to the graphic representation Workers have a range of job offers from which to choose of the theory of compensating wage differentials A compensating wage differential for risk of injury, for Employee Considerations example, simply could not arise if workers were able to Employees dislike the risk of being injured obtain only dangerous jobs. It is the act of choosing safe on the job. jobs over dangerous ones that forces employers offering Indifference curve in this figure slope dangerous work to raise wages. upward because the risk of injury is a “bad” job characteristics, not a “good” (such as leisure) In other words, if risk increases, wages must rise if utility is to be held constant. 2  11/23/2024 Indifference curves lying to the People differ in their aversion to the risk of being injured northwest represent higher utility (because a higher wage at a given risk level will generate more utility). Thus all points on curve U3 are preferred to those on U2, and those on U2 are preferred to The more sensitive workers will have the ones on U1. indifference curves that are steeper at At point K of curve U2, the person any level of risk. receives a relatively high wage and Point C lies on the indifference curve of faces a high level of risk. worker A, who is highly sensitive to risk At point J of curve U2, as risk levels and Point D lies on the indifference curve of wage rates fall, the person becomes less worker B, who is less sensitive to risk. willing to give up wages in return for the given reduction in risk; the danger is no longer imminent, and consumption of other goods is not as high. Employer Considerations Employers are faced with a wage/risk trade-off of their own that derives from 3 assumptions. 1. It is presumably costly to reduce the risk of injury facing employees. (Safety equipment must be placed on machines, production time must be sacrificed for safety training sessions, protective clothing must be furnished to workers, and so forth.) 2. Competitive pressures will presumably force many firms to operate at zero profit (that is, at a point at which all costs are covered and the rate of return on capital is about what it is for similar investments). 3. All other job characteristics are presumably given or already determined. The consequences of these 3 assumptions is that if a firm undertakes a program to reduce the risk of injury, it must reduce wages to remain competitive. Major Behavioral Insights 2 Major Insights of Hedonic Model 1. Wages rise with risk, other 2. Workers with strong preferences for things equal. safety will tend to take jobs in firms where safety can be generated most cheaply. According to this prediction, Workers who are not as averse to there will be compensating accepting risk will seek out and wage differentials for job accept the higher-paying, higher- characteristics that are viewed risk jobs offered by firms that find as undesirable by workers safety costly to “produce” whom employers must attract. 3  11/23/2024 Hedonic Wage Theory and Employee Benefits In this section, we use hedonic theory to analyze the labor market effects of employee benefits Employee Preferences 2 Broad Categories of Benefits 1. Payments in kind 2. Deferred Compensation Compensation in the form Compensation that is earned now such commodities as but will be paid in the form of employer-provided insurance money later on. Employer or paid vacation time contributions to employee pension plans make up the largest proportion of these benefits. 4