Question

Evaluate following statement using the theory on compensating wage differentials: “Mandating safety at work will surely improve worker’s welfare.” Use diagrams and a few bullet-points to justify your thinking.

Answer 1

Compensating wage differentials are offered to workers to compensate for the non_wage characteristics of the job.

Workers have different preferences and the working conditions differ from firm to firm. The different levels of wages and safety that the firm can provide while maintaining the same level of profit is given by isoprofit schedule. It shiws a diminishing marginal rate of transformation between wages and safety.

The safety measures provided by the firms will surely improve the welfare of the workers. The risk involved will be less . As a result the wages will be comparatively low than a job involving more risk. But their safety is ensured.