Hypothesis: Workers of equal skill paid the same wage if workers are mobile

Evidence: Wages differ

One reason: Jobs differ in factors other than wage

Good attributes

Indoors

Pleasant work environment

Flexible hours

Good benefits

Nice community amenities

Bad attributes

Hazardous

Dirty

Cold, wet, stormy

Long hours

Unstable labor demand

Jobs Rated Almanac

Ranking of jobs based onSalaryStresswork environmentcareer outlookSecurityphysical demand,

Federal Reserve Bank of Dallas. Have

A Nice Day: The American Journey to

Better Working Conditions.2000

Compensating Differential: Wage increase required to get worker to accept a bad job attribute or the wage decrease a worker is willing to accept to get a good job attribute

Example of compensating differentials

Two sector model

Two jobs: Garbage collector; Floor sweeper

Equal skill requirement

Garbage collection considered to have more bad job amenities

Example of compensating differentials

What if taste for bad amenity differ?

The case of flower picking and pollen

Quality of life ratings

Risk

Federal Reserve Bank of Dallas. Have A Nice Day: The American Journey to Better Working Conditions.2000

Federal Reserve Bank of Dallas. Have A Nice Day: The American Journey to Better Working Conditions.2000

Federal Reserve Bank of Dallas. Have A Nice Day: The American Journey to Better Working Conditions.2000

Fatality ratesCause

– Transportation 43%– Homicide 11%– Falls, struck, crushed 29%– Electrocution 5%– Chemical exposure 2%

Demographics– Male 93%– White 83%– Black 10%– Hispanic 12%– Age steady until age 55,rises afterward

• Incidence• Age < 55 5/100,000• Age 55-64 7/100,000• Age > 64 14/100,000

Source: National Census of Fatal Occupational Injuries, 1999

Fatality ratesIndustry Deaths per 100,000Private Industry 4.8Self-employed 11.1Agriculture 20.7Forestry/Fishing 53.7Mining 21.5Construction 14.0Manufacturing 3.6Transportation/Utilities 12.7

Wholesale 4.6Retail 2.3F.I.R.E. 1.2Services 1.9Government 2.8Source: National Census of Fatal Occupational Injuries, 1999

Tradeoff between risk and wages

Worker: Higher risk means need higher wages to compensate

Worker tradeoff characterized by indifference curve: all combinations of risk and wages that yield the same level of utility

Tradeoff between risk and wages

Risk aversion, risk neutral and risk loving

Tradeoff between risk and wages

Firm: Reducing risk is costly—firm needs to be able to lower wage to make back some of the higher costs

Firm tradeoff characterized by isoprofit line: all combinations of risk and wages that yield the same level of profit

Market

Risk

Wage

UA

UB

UC

ΠC

ΠB

ΠA

Market wage-risk tradeoff: Higher Risk Means Higher Pay

Computing market tradeoff between risk and wages

W = β0 + δ RISK + β1 ED + β2 EXP + β3 EXP^2 + γZ + ε

δ is a measure of the dollar change in the wage from a unit increase in risk

Measures of risk:Incidence of death per 100,000 per yearInjury rates

Earnings Function

Computing market tradeoff between risk and wages

W = β0 + δ RISK + β1 ED + β2 EXP + β3 EXP^2 + γZ + ε

Moore and Viscusi 1990 using 1982 data

Risk measured as deaths per 100,00 per yrδ = 0.027 ($/hr.)

Value of saving a life0.027 ($/hr)*2000(hr/yr)*100,000(worker years) = $5.4 million

In 2006 dollars, $11.4 millionImplications for large firms vs. small firms?

Regulatory Choices

Equipment Standards: Government sets specific requirement for each machine, piece of clothing, plant layout, …

• Rigid• EnforceablePerformance Standards: Government sets level of

outcomes, firm decides how to meet standard• Flexible• Hard to enforceInformation

Market

Risk

Wage

UA

UB

ΠB

ΠA

R

Will restrictions on Risk make workers better off?

RA RB

WB

WA

Market

Risk

Wage

UA

UB

ΠB

ΠA

R

Will restrictions on Risk make workers better off?

U’B

What if workers do not know risks

Risk

Wage

UB

ΠB

R

Worker thinks he is at B’ but is really at B

RBR’B

U’B

B’

B

Does OSHA (Occupational

Safety and Health Administration)

Work?

1970 Act

April 1971 OSHA starts

How do you assess how many injuries or deaths have been eliminated because of OSHA?

Does OSHA (Occupational

Safety and Health Administration)

Work?

Hard to find a break in the time series

Theodore K. Courtney and Edward A. Clancy “A Descriptive Study of U.S. OSHA Penalties and Inspection Frequency for Musculoskeletal Disorders in the Workplace.” AIHA Journal , 1998

Does OSHA (Occupational Safety and Health Administration) Work?

Inspect 1/200 firms per year

Bias toward investigating large firms

Grandfather old firms

Small fines, first violation typically a warning

Injury rates smallest in smallest and largest firms

Worker’s Compensation

Insurance that pays in the event of a work related injury

How does that affect the risk wage tradeoff?