Compensating Differentials
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0:00 - 0:04♪ [music] ♪
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0:09 - 0:10- In this short lecture,
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0:10 - 0:14I want to elaborate
on a surprising claim -
0:14 - 0:16made at the end of the last video.
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0:16 - 0:20Namely that firms have
an incentive to increase job safety -
0:20 - 0:24because then it can lower wages.
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0:27 - 0:30Recall that the main idea
of compensating variations -
0:30 - 0:35is that wages adjust until jobs
requiring a similar level of skill -
0:35 - 0:39have similar compensation packages.
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0:39 - 0:42What this means is that jobs
which aren't very fun -
0:42 - 0:46they have to have higher wages
compared to similar jobs, -
0:46 - 0:48which are more fun
and which therefore, -
0:48 - 0:51have to have lower wages.
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0:51 - 0:53The same thing goes for safety.
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0:53 - 0:56So if we were to replace fun
with safety jobs -
0:56 - 0:59with low levels of safety
have to have higher wages -
0:59 - 1:02compared to jobs
with high levels of safety -
1:02 - 1:05which are going
to have lower wages. -
1:05 - 1:07Let's see this in another diagram.
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1:07 - 1:09Let's consider two fishing jobs.
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1:09 - 1:12One in the Gulf of Mexico
is low risk. -
1:12 - 1:14The other in the frigid
choppy waters of the Arctic -
1:14 - 1:16has high risk.
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1:16 - 1:18If the jobs require
equal skill levels, -
1:18 - 1:21then the supply of workers
to the high-risk job -
1:21 - 1:23is going to be lower
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1:23 - 1:27and therefore the wage
is going to be higher. -
1:27 - 1:31In fact, the wage will adjust
till difference in wages -
1:31 - 1:34compensates for the risk.
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1:34 - 1:35Putting it the other way.
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1:35 - 1:38If firms were able
to make the Alaska job -
1:38 - 1:40as safe as the Mexico job,
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1:40 - 1:42they could pay lower wages
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1:42 - 1:45and what this means
is that the firm has an incentive -
1:45 - 1:48to invest in safety.
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1:48 - 1:52Whenever the cost of the investment
is less than the extra wages -
1:52 - 1:56the firm has to pay to compensate
the workers for risk. -
1:56 - 1:59Moreover, the more wages
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1:59 - 2:02that workers require
to take on risk. -
2:02 - 2:06the greater the firm's incentive
to invest in safety. -
2:06 - 2:08Now keeping this principle in mind
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2:08 - 2:13let's consider this along with
the history of developed countries. -
2:13 - 2:15Job safety is much higher today
in rich countries -
2:15 - 2:17than in poor countries
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2:17 - 2:19and it's much higher today
than in the past -
2:19 - 2:21when rich countries were poorer.
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2:21 - 2:24Many people think
that this increase in job safety -
2:24 - 2:27is due to government regulations
and to unions -
2:27 - 2:31but in fact those factors
have played only a small role. -
2:31 - 2:34The major cause
of increased job safety -
2:34 - 2:38is increasing wealth
and the profit motive. -
2:38 - 2:40As workers have become wealthier,
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2:40 - 2:44they have demanded
higher wages to take on risk -
2:44 - 2:48and that in turn has increased
the incentive of firms -
2:48 - 2:50to make workplaces safer
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2:50 - 2:54because firms are able to pay
lower wages for safer jobs. -
2:54 - 2:59In other words, rich workers
buy more Plasma TVs -
2:59 - 3:04and they also buy
more workplace safety. -
3:04 - 3:08The profit motive is a reason
to supply workers with Plasma TVs -
3:08 - 3:13and it's also a reason
to supply workers with safer jobs. -
3:13 - 3:15There are, however,
two qualifications. -
3:15 - 3:18Let's take a look at those.
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3:18 - 3:20So the profit motive
give firms an incentive -
3:20 - 3:24to supply workers with goods
like Plasma TVs -
3:24 - 3:27and also to supply
workplace safety. -
3:27 - 3:30This process works however
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3:30 - 3:33only when workers
know about the risks. -
3:33 - 3:37Workers won't accept
lower wages to reduce risks -
3:37 - 3:38that they don't know about.
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3:38 - 3:41Fortunately, workers' compensation,
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3:41 - 3:44the government required
insurance system, -
3:44 - 3:46is experience rated.
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3:46 - 3:49Firms which have
more accidents pay more. -
3:49 - 3:53So firms do have an incentive
to take into account hidden risks -
3:53 - 3:59so long as they occur
when the worker is on the job. -
3:59 - 4:02Risks that are hidden
and that don't occur on the job. -
4:02 - 4:04Things like risk
from asbestos, cancer, -
4:04 - 4:06radiation risks, and so forth.
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4:06 - 4:10They will not be handled very well
by the market process -
4:10 - 4:12or by workers' compensation.
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4:12 - 4:15Unfortunately,
no system works all that well -
4:15 - 4:17for hidden long-run risks
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4:17 - 4:19but the tort system
and government regulation -
4:19 - 4:25do have a role to play in handling
these hidden long-run risks. -
4:25 - 4:29Okay, that's it for job safety
and compensating variations. -
4:29 - 4:31See you next time.
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4:31 - 4:34- If you want to test yourself,
click practice questions -
4:34 - 4:38or if you're ready to move on
just click "Next video."
- Title:
- Compensating Differentials
- Description:
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Firms have an incentive to increase job safety, because then they can lower wages. In this video, we explore this surprising claim in much greater depth. Bear in mind that wages adjust until jobs requiring a similar level of skill have similar compensation practices. Why do riskier jobs often pay more? Why has job safety increased over the years? How does a firm’s profit motive play a role?
Microeconomics Course:http://mruniversity.com/courses/principles-economics-microeconomic
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/compensating-differentials-wages#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/do-labor-unions-raise-wages-workers
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 04:43
Theresa Ranft edited English subtitles for Compensating Differentials | ||
Theresa Ranft edited English subtitles for Compensating Differentials | ||
Theresa Ranft edited English subtitles for Compensating Differentials | ||
Theresa Ranft edited English subtitles for Compensating Differentials | ||
Theresa Ranft edited English subtitles for Compensating Differentials | ||
Theresa Ranft edited English subtitles for Compensating Differentials | ||
MRU2 edited English subtitles for Compensating Differentials | ||
MRU2 edited English subtitles for Compensating Differentials |