# LABOR ECONOMICS HEDONIC THEORY

Labor Economics Hedonic Theory

Homework: Hedonic Theory

Assume

that there is a baseline risk of death on the job of q

0

percent annually. Firms can invest to

reduce this risk, so that actual risk at a job is q(

i

)=q

0

i

*ß.

Here i is amount invested

into reducing

the

risk

a given employee faces

.

Of course mortality is bounded below by 0, so the

maximum productive

amount that can be invested i

n reduci

ng mortality risk i

s i

Max

= q

0

/ß .

All firms produce the same good c

and this good has a price equal to 1.

All workers are equally productive and produce an output of

H

of

the consumption good.

Question 1

D

erive an expression of wages

w(q)

in this

economy that has to be satisfied by wage

risk combinations

that

competitive

firms would be willing to

offer to workers in equilibrium.

Question 2

Consider now individuals that have preferences over consumption and risk of death given by

(,)

Ucs

,

where

0

s

q

q

?

?

is “job safety” relative to base

line risk

0

q

.

Write down the maximization problem

that workers face

and illustrate the choice problem in a graph

in a two

dimensional graph with c and s

on the axes

.

Assume that the parameter values are such that the solution is in the interior (ie

0

sq

?

)

Question 3

Say

consumers preferences are such that a both c and s are normal goods. Assume furthermore that

individuals differ in

the

human capital

H

(but still everybody has

0

sq

?

)

.

Consider two individuals of

whom one has a higher level of H than the other. W

ho will earn higher wages and who will face greater

risk?

Will the two individuals differ in their Value of a Statistical L

ife (VSL)?

Question 4

Use your answer to question 3 to explain why it might be difficult

to empirically measure the VSL using

the relation between wages and risk.

SHORT, PRECISE, CLEAR, AND CORRECT ANSWERS RECEIVE FULL POINTS.