ECON 3317- Midterm Exam Guide - Comprehensive Notes for the exam ( 47 pages long!)

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Published on 12 Oct 2017
Department
Course
BC
ECON 3317
MIDTERM EXAM
STUDY GUIDE
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Lecture 4: Compensating Differentials
What are they? How do they relate to inequality of income/benefits?
oSometimes, there is inequality by choice.
oCompensating wage differential: the amount more or less a firm must
pay a worker to accept a characteristic of the job that is undesirable
(Desirable)- more dangerous jobs and late night jobs- paid more.
oDoes not include wage differentials due to differences in worker skill,
worker supply, or other issues of productivity that may be industry
specific
oPeople working night shift typically make 4% more than workers who
work during the day shift b/c night time work is undesirable the firm
must compensate workers to get them to work at night
oThey lead to inequality in wages across people who might otherwise
look exactly the same
Employee view: Graphing the trade off between the wage and job
characteristics
oCompensating differentials serve as a reward or incentive to accept
work that would be undesirable to another, otherwise similar worker
oFrom a societal perspective, we have many jobs that are
undesirable/dangerous (coal mining) and we want to encourage
people to do those jobs. Could force them to do it or could choose to
allow firms to compete for workers by offering higher wages if the job
they are offering is somehow undesirable
oCompensating differentials put a price on the value of work conditions
and to the worker represent a trade-off between safety, convenience,
cleanliness, etc. and consumption
Employee tradeoff- indifference curves
oAssumptions: employees maximize utility, workers know and
understand the risks across jobs, workers can move from job to job
easily
oHeterogeneity in willingness to accept risk graph: Person A does not
like risk person B is willing to tolerate risk
Lost utility from extra risk, extra utility from consumption
oTradeoff- they can increase their wage by taking on more risk
Employer view
oHow much are they willing to reduce risk or allow it given they have
to pay a certain wage to do it. Avoid potentially high costs of
performing costly risk reductions (or other things that might make a
job more pleasant)
oThree assumptions: 1) costly to make adjustments to risk, 2) firms are
competitive and generally operating near zero profit point 3) within
firm we are looking at, they have the same job characteristics other
than the one of interest
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oIsoprofit curves: show variance combinations of risk of injury and
wage were the firm is making the same profit
More risk and higher wages lead to same profit but how? If
there is more risk, there is less cost of reducing risk so it evens
out
oHeterogeneity in costliness to reduce risk graph: B has to cut the wage
a LOT to become safer- cool with high risk because costly to make it
safer. Firm A – not very costly to reduce risk- don’t need to cut wages
by a lot- cool with lower risk because not as expensive to make it safer
Matching employers and employees
oThe goal of the employee is to maximize their utility by choosing a job
with a level of risk and wage that is optimal to them- employees are
constrained by the offers that arrive to them
oFirm goal is to mazimize profits by offering a wage and reducing risk.
Firm constrained by two forces: 1) it cannot offer wages that are too
large, else other firms will undercut them 2) It cannot offer wages that
are too small, else it will not be able to attract workers
oThe process by which employers and employees meet and decide to
work is described in Economics as matching: in this case, a firm and
employee meet, the firm offers a wage and corresponding risk, and
the employee decides whether to accept the offer
oPerson A takes a job at the lower wage (Firm B) because they dislike
risk and Person B takes a job at Firm A because they like risk
Regulating risk
oThe government may feel it necessary to regulate risk if it feels it is
beneficial to employees
o1970- Occupational Safety and Health Act (OSHA) that sought to
ensure the highest degree of health and safety protection for the
employee
oOur theory tells us that people in the riskiest job may also have the
highest tolerance for risk and gain utility form working these jobs and
receiving a high wage
oWhen risk levels higher than R(a) illegal: Worker A safer and happy,
worker b is made safer and forced to accept a job with lower risk,
Firm B cannot operate and forced out of business, income inequality is
reduced within the industry and all workers in the model make the
same amount of money (possible increased across industries) and
worker B is made worse off from a utility prospective and a wage
prospective
Value of regulating risk
oAsbestos- used in US industry as insulation- thousands of ships in
WWII had asbestos used in the piping and insulation
oWasn’t until the late 1970s that US began to act on reducing exposure-
has been linked to 100,000 deaths
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Document Summary

Lost utility from extra risk, extra utility from consumption: tradeoff- they can increase their wage by taking on more risk. Employer view: how much are they willing to reduce risk or allow it given they have to pay a certain wage to do it. Firm a not very costly to reduce risk- don"t need to cut wages by a lot- cool with lower risk because not as expensive to make it safer. Value of regulating risk: asbestos- used in us industry as insulation- thousands of ships in. Lecture 16: economics of opportunity; circumstances and choice. Two different views on equality of opportunity: generally, as a society, we think of equality of opportunity in two ways a. i. The level the playing field definition: during people"s formative years we should provide resources so that when it comes time to compete for positions (college jobs) all people have the attributes they need a. i. 1.

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