EC306 Lecture Notes - Lecture 8: Tangent, Risk Premium, Diminishing Returns
Document Summary
Chapter 8 compensating wage differentials and labour markets. Before (cid:449)e talked a(cid:271)out ho(cid:449) (cid:449)ages are deter(cid:373)i(cid:374)ed (cid:449)he(cid:374) (cid:449)orker"s are ho(cid:373)oge(cid:374)ous. Clearly there is a lot of variation in wages in the economy: even among workers in similar occupations. Wage differentials can arise due to of heterogeneity in jobs and worker preferences. This chapter explores the impact of differences in job amenities on the determination of wages and employment. Starting point for understanding why there is a great amount of variations in wages. Adam smith proposed the idea that job characteristics influence the labour market equilibrium. In1776 he argued that compensating wage differentials arise to compensate workers for the non-wage 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.
