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ECON303: Labor Economics

  • Unit 5: Compensating Wage Differentials  

    In the previous units, you learned how a worker decides whether he or she should work or not, and how long he or she should work for.  These units worked from a competitive labor market model based on the assumption that all jobs and workers are homogenous in nature.  In this scenario, the compensation was the sole factor that determined whether an individual would take a job or not.  In reality, however, we cannot ignore the heterogeneous nature of both the work force and the job market; we know that different workers focus on different aspects of a job when making the decision to work or not.  Therefore, we will now adopt a more realistic approach, considering the roles that both compensation and non-wage characteristics play in an individual’s decision to accept a given job offer.  The differences between types of labor and the skill sets that workers have result in corresponding differences in wages.  In this unit, you will study how differences in job characteristics have an impact on the determination of wages and employment.  (The determination of wages and employment due to differences in skills of workers will be presented in the next section.)

    Unit 5 Time Advisory

    This unit should take you 6 hours to complete.

    ☐    Subunit 5.1-5.2: 2 hours* 

    ☐    Subunit 5.3-5.4: 2 hours

    ☐    Assessment: 2 hours

    *(Note: The audio narration for “Chapter 8” is 50 minutes long.)

    Unit5 Learning Outcomes

    Upon successful completion of this unit, students will be able to:

    • Analyze the reasons behind wage differentials due to non pecuniary characteristics of alternative types of employment.

    • Analyze the hedonic pricing model with the end result of employer-employee matching and analyze the theoretical model to the case study presented in the end of this unit.

    - Analyze how equilibrium is reached in the market for risky jobs.

    • Mathematically use the concept of compensating wage differentials.
    • Lecture: SUNY-Oswego: Professor John Kane's Lecture notes on Introduction to Labor Economics: “Compensating Wage Differentials (Chapter 8)”

      Link: SUNY-Oswego:  Professor John Kane's Lecture notes on Introduction to Labor Economics: Compensating Wage Differentials (Chapter 8)” (HTML, Adobe Flash, or Powerpoint)
       
      Instructions:  Please click on chapter 8 from the Table of Contents.  Note that the material is presented in three formats: Single document HTML format, narrated PowerPoint, and PowerPoint Slideshow.  Please go through the narrated PowerPoint to best understand the material.  You can read the HTML text to review the material after listening to the audio.  However, you may skip the notes presented in the PowerPoint slides as they are a repetition of the slides that accompany the audio.  If the audio does not work at first, refresh your browser. This reading covers subunits 5.1-5.2.
       
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 5.1 Understanding Compensating Wage Differentials  

    Note: This subunit is covered by the reading assigned under Unit 5.

  • 5.2 The Hedonic Pricing Model  

  • 5.2.1 Workers' Indifference Curves  

    Note: This subunit is covered by the reading assigned under Unit 5.

  • 5.2.2 Firms' Isoprofit Curves  

    Note: This subunit is covered by the reading assigned under Unit 5.

  • 5.2.3 Equilibrium: Employer Employee Matching  

    Note: This subunit is covered by the reading assigned under Unit 5.

  • 5.2.4 Analysis: Occupational Safety and Health Administration (OSHA) Requirements  

    Note: This subunit is covered by the reading assigned under Unit 5.

  • 5.3 The Market for Risky Jobs  

    • Reading: University of Pittsburgh: Professor Alexis León's Lecture notes on Labor Economics: “Handout #6 (Compensating Wage Differentials)”

      Link: University of Pittsburgh:  Professor Alexis León's Lecture notes on Labor Economics: Handout #6 (Compensating Wage Differentials)” (PDF)
       
      Instructions:  Please click on the Notes/Links tab and scroll down to handout #6 (Compensating Wage Differentials) to download the pdf file.   This reading covers subunits 5.3.1-5.3.3.
       
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 5.3.1 The Demand Curve for Risky Jobs  

    Note: This subunit is covered by the reading assigned under Unit 5.3.

  • 5.3.2 The Supply Curve when Jobs are Risky  

    Note: This subunit is covered by the reading assigned under Unit 5.3.

  • 5.3.3 Equilibrium  

    Note: This subunit is covered by the reading assigned under Unit 5.3.

  • 5.4 Using Compensating Differentials  

    • Reading: New York University: Professor Matthew Wiswall’s “Lecture Notes on Labor Economics”

      Link: New York University: Professor Matthew Wiswall's “Lecture Notes on Labor Economics” (PDF)
       
      Instructions: Please choose “Lecture Notes” from the list to access the pdf file with the lecture notes.  Scroll down to page 74, section 8 ("Compensating Differentials") and read the section in entirety, all the way up to page 77.  This reading covers subunits 5.4.1-5.4.4.
       
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 5.4.1 A Model of Compensating Differentials  

  • 5.4.2 What Is the Value of a Human Life?  

  • 5.4.3 What Is the Value of School Quality?  

  • 5.4.4 Limitations of Compensating Differentials  

  • Unit 5 Assessment and Guest Lecture  

    • Assessment: University of Wisconsin: Professor John Kennan’s “Assignments for Labor Economics Course”

      Link: University of Wisconsin: Professor John Kennan’s “Assignments for Labor Economics Course” (HTML)
       
      Instructions: Please click on Assignment 3 to answer the second question based on wage differentials.  Click on “Answer Notes” to compare your results with the answers given.
       
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

    • Guest Lecture: TED talks: "Steven Levitt Analyzes Crack Economics"

      Link: TED talks: “Steven Levitt Analyzes Crack Economics” (YouTube)

      Instructions:  This is an optional lecture and not a requirement of the course.  In this guest lecture, the speaker presents a light-hearted rendition of his research of drug dealers and draws comparisons between the characteristics of drug dealing and economics principles.

      Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. It is attributed to TED and the original version can be found here.