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♪ [music] ♪

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- In this short lecture,

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I want to elaborate [br]on a surprising claim

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made at the end of the last video.

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Namely that firms have[br]an incentive to increase job safety

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because then it can lower wages.

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Recall that the main idea [br]of compensating variations

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is that wages adjust until jobs[br]requiring a similar level of skill

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have similar compensation packages.

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What this means is that jobs [br]which aren't very fun

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they have to have higher wages [br]compared to similar jobs,

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which are more fun [br]and which therefore,

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have to have lower wages.

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The same thing goes for safety.

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So if we were to replace fun [br]with safety jobs

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with low levels of safety [br]have to have higher wages

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compared to jobs [br]with high levels of safety

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which are going[br]to have lower wages.

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Let's see this in another diagram.

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Let's consider two fishing jobs.

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One in the Gulf of Mexico[br]is low risk.

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The other in the frigid[br]choppy waters of the Arctic

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has high risk.

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If the jobs require[br]equal skill levels,

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then the supply of workers [br]to the high-risk job

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is going to be lower

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and therefore the wage [br]is going to be higher.

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In fact, the wage will adjust [br]till difference in wages

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compensates for the risk.

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Putting it the other way.

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If firms were able [br]to make the Alaska job

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as safe as the Mexico job,

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they could pay lower wages

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and what this means [br]is that the firm has an incentive

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to invest in safety.

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Whenever the cost of the investment[br]is less than the extra wages

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the firm has to pay to compensate[br]the workers for risk.

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Moreover, the more wages

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that workers require[br]to take on risk.

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the greater the firm's incentive [br]to invest in safety.

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Now keeping this principle in mind

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let's consider this along with [br]the history of developed countries.

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Job safety is much higher today [br]in rich countries

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than in poor countries

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and it's much higher today [br]than in the past

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when rich countries were poorer.

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Many people think [br]that this increase in job safety

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is due to government regulations [br]and to unions

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but in fact those factors [br]have played only a small role.

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The major cause [br]of increased job safety

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is increasing wealth [br]and the profit motive.

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As workers have become wealthier,

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they have demanded[br]higher wages to take on risk

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and that in turn has increased [br]the incentive of firms

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to make workplaces safer

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because firms are able to pay [br]lower wages for safer jobs.

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In other words, rich workers [br]buy more Plasma TVs

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and they also buy [br]more workplace safety.

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The profit motive is a reason [br]to supply workers with Plasma TVs

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and it's also a reason [br]to supply workers with safer jobs.

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There are, however, [br]two qualifications.

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Let's take a look at those.

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So the profit motive [br]give firms an incentive

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to supply workers with goods [br]like Plasma TVs

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and also to supply[br]workplace safety.

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This process works however

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only when workers[br]know about the risks.

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Workers won't accept [br]lower wages to reduce risks

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that they don't know about.

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Fortunately, workers' compensation,

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the government required[br]insurance system,

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is experience rated.

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Firms which have [br]more accidents pay more.

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So firms do have an incentive [br]to take into account hidden risks

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so long as they occur [br]when the worker is on the job.

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Risks that are hidden [br]and that don't occur on the job.

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Things like risk[br]from asbestos, cancer,

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radiation risks, and so forth.

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They will not be handled very well [br]by the market process

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or by workers' compensation.

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Unfortunately,[br]no system works all that well

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for hidden long-run risks

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but the tort system [br]and government regulation

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do have a role to play in handling [br]these hidden long-run risks.

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Okay, that's it for job safety [br]and compensating variations.

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See you next time.

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- If you want to test yourself, [br]click practice questions

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or if you're ready to move on [br]just click "Next video."