Suppose that all workers value a 1% reduction in the workplace injury rate at $1,000.The cost of reducing the injury rate by 1% is $200 per worker.Firms currently pay $20,000 per year to workers,without any effort to improve safety.
Suppose new firms began to offer workers $19,500 and a 1% reduction in the injury rate.The total cost of hiring a worker to the existing firms is __________ and to the new firms it is __________.

Question

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For the existing firm, the cost of hiring a worker is $20,000 without any effort to improve safety. If they decide to reduce the injury rate by 1%, the cost of hiring a worker will increase by $200, so the new cost will be $20,200 per worker.

For the new firms, the cost of hiring a worker will be $19,500 with a 1% reduction in the injury rate. Since all workers value a 1% reduction in the workplace injury rate at $1,000, this is equivalent to offering them $1,000 in addition to the $19,500 wage. Therefore, the total cost of hiring a worker for the new firms will be $20,500 per worker.

Thus, the total cost of hiring a worker to the existing firms is $20,200 and to the new firms it is $20,500. Since the new firm offers a better wage and safety improvement package, workers will prefer to work for the new firms. Therefore, the best choice is the new firms with a total cost of $20,500 per worker.

Suppose That All Workers Value a 1% Reduction in the Workplace