Deck 5: Compensating Wage Differentials

Question 1

Assume that the market-clearing wages are $10 per hour in a safe job and $18 per hour in a risky job. Then, at the completion of a war, many ex-soldiers who enjoy risky ventures enter the labor market. Which of the following is not a likely outcome of this change?

A) Many firms that currently offer risky jobs will begin offering safe jobs.
B) The fraction of people working safe jobs will decrease.
C) The wage associated with risky jobs will decrease.
D) The number of people working risky jobs will increase.
E) The wage differential will decrease.

Answer 1

A

Question 2

The equilibrium hedonic wage function is most likely

A) horizontal as no firm will overpay for workers.
B) horizontal as firms will choose their optimal level of safety.
C) a single point, as all firms will choose the same level of risk, and consequently all workers will be paid the same wage.
D) upward sloping as firms that offer riskier jobs usually pay higher wages.
E) downward sloping as firms that offer riskier jobs are usually able to pay lower wages.

Answer 2

D

Question 3

The market-clearing wage differential between a safe and risky job is $5000. Which of the following is not true?

A) The marginal worker is indifferent between working the safe or risky job.
B) All but the marginal worker in safe jobs require a wage differential above $5000 to accept a risky job.
C) All but the marginal worker in the risky job require a wage differential below $5000 to be indifferent between safe and risky jobs.
D) The per-worker cost for any firm to change technologies to offer safe jobs in place of risky jobs is $5000.
E) The average per worker cost of offering safe jobs exceeds $5000 at the risky firms.

Answer 3

D

Question 4

The supply curve of labor to risky jobs reveals.

A) how many workers are willing to offer their labor to the risky job as a function of the wage differential between the risky job and the safe job.
B) how many workers are willing to offer their labor to the risky job as a function of the wage paid to workers of the safe job.
C) how many workers are willing to offer their labor to the safe job as a function of the wage paid to workers of the risky job.
D) the number of workers who dislike risky jobs.
E) the fraction of workers who dislike risky jobs.

Question 5

Under normal circumstances, the equilibrium compensation wage differential is the wage differential that exactly attracts the

A) average worker into a regular job.
B) marginal worker into a risky job.
C) average worker into a less risky job.
D) marginal worker into the labor market.
E) average high-skilled worker into a low-skill job.

Question 6

Abby's reservation price for working in a risky job is $5 per hour while Rudy's reservation price for working in a risky job is $8 per hour. Characterize Abby and Rudy's job selections if safe jobs pay $12 per hour and risky jobs pay $18 per hour.

A) Abby and Rudy both work a safe job.
B) Abby works a safe job while Rudy works a risky job.
C) Abby works a risky job while Rudy works a safe job.
D) Abby and Rudy both work risky jobs.
E) Rudy works a risky job while Abby does not care which type of job she works.

Question 7

A hedonic wage function could be applied to which of the following job characteristics?

A) the probability of being injured on the job
B) the degree to which a job involves monotonous work
C) the degree to which the area surrounding the job location is safe
D) the degree to which a job involves strenuous work
E) All of the above can be represented with a hedonic wage function.

Question 8

A standard hedonic wage function might show what relationship?

A) the relationship between the wage and a worker's age
B) the relationship between the wage and a worker's race
C) the relationship between the wage and a worker's gender
D) the relationship between the wage and the probability of injury faced by the worker
E) the relationship between the wage and a worker's skill level

Question 9

The correlation between wages and the probability of encountering a fatal injury while on the jobs can be used to calculate the value of

A) risk.
B) safety.
C) life.
D) injury.
E) work.

Question 10

In the standard theory of compensating differentials, a worker's reservation price is the

A) amount of money it takes to entice the worker into accepting a risky job.
B) amount of money it costs a worker to take a risky job.
C) amount of money a worker loses for not taking any job.
D) amount of money it costs a worker to take a safe job.
E) difference between the wage paid in firms offering risky jobs and the wage paid by firms offering safe jobs.

Question 11

Risk-averse workers

A) have shallow wage-risk indifference curves when risk is graphed on the x-axis.
B) are willing to work in riskier environments for a relatively low increase in the wage.
C) are willing to accept large wage decreases in exchange for a safer work environment.
D) never work in risky environments.
E) are more productive than risk-loving workers.

Question 12

Suppose there are two types of jobs-safe and risky. Safe jobs currently pay $10 per hour. Risky jobs currently pay $20 per hour. The government intervenes in the market, mandating that all firms offer safe jobs and pay a wage of $10 per hour. Which of the following is true?

A) Workers who originally worked safe jobs are helped by the policy.
B) Firms that originally offered safe jobs are hurt by the policy.
C) Workers who originally worked risky jobs are helped by the policy.
D) Firms that originally offered risky jobs are hurt by the policy.
E) No one is hurt by the new policy.

Question 13

When graphing a worker's indifference curves in Probability of Injury (x-axis) versus Wage (y-axis) space, Al's indifference curves are steeper than Pete's indifference curve. In this case,

A) Al is more risk loving than Pete.
B) Al requires a greater wage increase than Pete in order to willingly take on more risk.
C) Al will end up receiving a higher wage than Pete.
D) both are risk neutral.
E) Al will only accept a job if it offers no risk of injury.

Question 14

The value of life is calculated by comparing

A) wages to risk levels.
B) risk levels to the number of children in a worker's household.
C) wages to the number of children in a worker's household.
D) average life expectancy by occupation to average risk levels by industry.
E) average wages to the average retirement age.

Question 15

In Probability of Injury (x-axis) versus Wage (y-axis) space, isoprofit curves slope upward because

A) profits increase with the number of workers the firm employs.
B) workers are willing to accept a lower wage in exchange for a riskier work environment.
C) the firm does not like to pay higher wages.
D) profits are constant with respect to risk.
E) in order to keep profits constant, a higher wage must be offset by the firm saving money by not investing as much in preventing on-the-job injuries.

Question 16

When a worker and firm are matched on the hedonic wage function, it is implied that

A) the worker cannot receive a higher wage at any other firm.
B) the worker-firm match is efficient in the sense that neither the worker nor the firm could become better off with a different match.
C) the firm could increase its profits by offering a safer job as doing so would allow the firm to lower the wage it pays.
D) the hedonic wage function must be very steeply sloped to ensure that the worker does not accept a better paying job.
E) the worker receives no surplus from the match.

Question 17

Estimates of the compensating wage differentials associated with particular job characteristics are valid only if

A) all other factors that influence worker's wages are held constant.
B) nonwage characteristics of the job are allowed to vary by sector.
C) firms are willing to pay higher wages to more skilled workers.
D) the compensating wage differential is positive.
E) the firm provides nonpecuniary compensation for risks that workers encounter on the job.

Question 18

In order for the compensating differential associated with a risky job to be negative (so that a risky job pays less than a nonrisky job), it must be that

A) many workers are willing to work the risky job for free.
B) most workers prefer the risky job to the safe job when both wages are equal.
C) the number of risky jobs is less than the number of workers who prefer the risky job.
D) there is great demand for labor in both sectors.
E) the government mandates that the wages in the two sectors be equal.

Question 19

Which of the following is not a property of isoprofit curves graphed in Probability of Injury (x-axis) versus Wage (y-axis) space?

A) All points on each isoprofit curve yield the same level of profit.
B) Profit-maximizing firms are indifferent as to where they operate on any given curve.
C) Isoprofit curves going out along the x-axis yield higher profits.
D) Isoprofit curves going up along the y-axis yield higher profits.
E) Isoprofit lines are upward sloping.

Question 20

The cost of offering safe versus risky jobs in the highway construction industry vary across firms. In the end, we would expect the market equilibrium to

A) randomly match workers to jobs.
B) match workers who dislike risk to the highest paying jobs.
C) match workers who dislike risk to firms that find it cheapest to offer safe jobs.
D) have firms that face a high cost of offering safe jobs to pay the lowest wages.
E) have firms randomly choose their level of safety.

Question 21

One implication of the theory of compensating differentials is that jobs in states with high income tax rates are likely to

A) be associated with more fringe benefits.
B) be associated with fewer fringe benefits.
C) pay the same wage and offer the same fringe benefits package as the same jobs in lower-tax states.
D) have worse working conditions.
E) be seasonal in nature.

Question 22

Having the government regulate workplace safety would most likely improve economic efficiency if

A) the cost of introducing safety equipment is high.
B) workers value safe work environments.
C) workers are unable to correctly judge the risk associated with a particular job.
D) firms are unable to attract workers to safe jobs.
E) firms and workers differ on the value they place on safe versus risky jobs.

Question 23

Assuming that workers are fully aware of their working conditions, which of the following will not happen when the government mandates pollution control to protect workers' health?

A) Worker utility will increase.
B) Employment will likely decrease.
C) The air in workplaces will become cleaner.
D) Firms with low profits before the mandate may shut down or exit the industry.
E) Wages will fall at all but the cleanest firms.

Question 24

Empirically, women who are married to a spouse who has access to health insurance earn higher wages and are less likely to be offered employer-sponsored health insurance than are married women whose spouse does not have access to health insurance. This pattern

A) is unexpected as wages should be unrelated to fringe benefits.
B) supports the theory of compensating differentials as it indicates there is a trade-off between wages and benefits.
C) supports the theory of compensating differentials as it indicates there is no trade-off between wages and benefits.
D) fails to provide support for the theory of compensating differentials.
E) contradicts the result that the hedonic wage function is upward sloping.

Question 25

Suppose 1 in 200 pilots flying Space-Race aircraft die each year while only 1 in 500 pilots flying Subspace Gliders die each year. Moreover, the average salary of Space-Race pilots is $115,000 while the average salary of Subspace Glider pilots is $109,000. Given this information, what is the implied statistical value of a life of a pilot?

A) $6,000
B) $120,000
C) $480,000
D) $1,200,000
E) $2,000,000

Question 26

When the government imposes safety regulations on a particular job or labor market, what is most likely to happen?

A) Wages will increase.
B) Utility will increase if workers are able to correctly evaluate working conditions.
C) Wages will fall but utility will increase if workers misperceive on-the-job risk.
D) Employment will increase.
E) Firms that used to offer bad working conditions will be required to shut down.

Question 27

A potential implication of OSHA regulation is that

A) the most risk-averse workers begin working the riskiest jobs.
B) the hedonic wage function may no longer exists at the safest levels.
C) the hedonic wage function may no longer exists at the riskiest levels.
D) average wages increase.
E) for the same amount of output produced, total production costs will be less.

Question 28

Ability bias can arise when estimating compensating wage differentials associated with various job characteristics. What is ability bias in this context?

A) Low-skilled workers are likely to have low wages but good job amenities.
B) High-skilled workers are likely to have high wages but poor job amenities.
C) High-skilled workers are likely to have lower wages than unskilled workers but to have better job amenities.
D) High-skilled workers are likely to have higher wages than unskilled workers but to have worse job amenities.
E) High-skilled workers are likely to have higher wages than unskilled workers, but they are also likely to trade some of their higher wages for better job amenities.

Question 29

A firm has the choice of offering "dirty" jobs that are likely to cause severe health problems for its workers or of offering "clean" jobs by installing safety equipment at a cost of $5 per hour per employee that will substantially reduce the chances of health problems. The firm will

A) install the safety equipment if workers can ascertain whether they are working a dirty or a clean job.
B) never willingly choose to install the costly safety equipment.
C) never install the safety equipment without a government subsidy to do so.
D) install the safety equipment if workers are willing to be paid $3 per hour less in a clean job than in a dirty job.
E) willingly install the safety equipment if workers are willing to be paid $7 per hour less in a clean job than in a dirty job.

Question 30

If the U.S. system of unemployment insurance did not exist, one would predict that

A) workers would never become unemployed.
B) workers who became unemployed would remain unemployed for longer durations.
C) no worker would accept a job that is associated with seasonal unemployment.
D) seasonal unemployment would cease to exist.
E) workers in jobs that face seasonal cycles of unemployment would be paid higher wages.