Compensating Wage Differentials

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qje702003

Economics

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Let worker preferences be given by Uly.ee) = y-eo where y is income (or consumption), e is required effort or "disagreeableness of the job and is the disutility of effort for the worker. Assume that is distributed uniformly across the population over the range (0.2), hence the CDF of is G(O)=(0/2) over (0,2). If a worker decides not to participate in the labour market, then y=0 and e=0 hence U=0. The firms' production technology is given by f(e)=In(e+1). Profit per worker is then f(e) - W. Assume perfect competition where there is free entry and hence firms will break-even (making O profit). a) If all jobs are homogeneous with e=2, what will be the competitive equilibrium wage and what fraction of the population will be employed? Who is the marginal worker? b) Now allow for heterogeneous jobs, where job attribute e potentially varies between [0..). Again assuming perfect competition, with free entry ensuring each firm just breaks-even, what is the wage-offer curve available to workers? What fraction of the population will participate in the labour market now? What type of individual will be matched to jobs with e=2, and what is the compensating wage differential for the marginal worker accepting an e=2 job?
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