Question

Graphically derive the hedonic model. Using this derivation, show the case of a worker who chooses a high wage and high risk and one that chooses a low wage-risk combination. Why would this be so? Can OSHA help the first worker? Discuss cases where it can, and those where it cannot.

Answer 1

Hedonic Pricing Model

OSHA - Occupational Safety, and, Health Administration

Borjas and, Ehrenberg's work shows fully informed workers that eliminate jobs with risk. These workers are harmed by safety, and, health standards. These workers choose low risk, and, eliminate jobs with risk, without considering any feedback effects of regulations on hedonic equilibrium. Hedonic wage function maps the relation between the probability of an action, and, wages.

Flattening of hedonic function means added compensation for accepting job hazards is lower. Workers thus prefer low risk, and, desire safer jobs.

With OSHA, workers gain; firms, and, consumers lose

If a worker accepts a job with a high chance of injury. OSHA regulations increase the maximum observed chance of injury. It increases the firms' costs of accidents. If hedonic wage function remains the same, workers' welfare falls. The hedonic function rises, then, the worker moves to a higher indifference curve. As the wage function rises, those employed in low-wage, low-risk jobs also gain. Higher labour costs reduce firm profitability.