Question

Labor Economics

State whether you agree or disagree with each of the following statements. If you agree with the statement, explain why you agree, and if you disagree, explain why you disagree (include the correct statement in your answer). Illustrate your answers using diagrams where appropriate.

a) An increase in the price of employer provided health insurance is likely to lead to an increase in the number of hours worked by employees.

b) All else equal, a firm that requires general training is more likely to enter into a deferred wage contract than a firm that requires firm-specific training.

c) In a model of compensating wage differentials the indifference curves of risk lovers are steeper than those of risk-averse workers

Answer 1

a. I disagree with the above statement as when the employer provide health insurance to the workers they just compensate  the cost of their health insurance.Rather than receiving additional compensation and buying an insurance cover for themselves  employees find it easy  to obtain coverage through their employers. It does increase their productivity and improve their health but it will not directly lead to an increase in working hours.

b.I disagree. In  a deferred wage contract a portion of emplyee's earnings are paid at a later date such as pension, employee stock options , gratuity etc. A firm that requires general training will not adopt a deferred wage contract as it will not suffer the cost of training much if a worker leaves the job and the worker will undergo such kind of training in any organisation they join but if a firm requires firm specific training than it will enter into a deferred wage contract because the training will entirely be for the purpose of firm and the company will suffer if a worker leaves a job so deferring their payments will make workers stick to the company and be loyal to it.

c . I disagree. Wage differentials are different wages offered to workers to compensate for certain differences in jobs such as jobs involving more risk like those of coal miners or wages given to work on a particular machine which can cause injury etc. If we move up the indifference curve it will indicate increase in wages required by workers for giving up every one unit of safety thus workers with a high need for  safety i.e. risk averse will require bigger wage increase for a decrease in safety than the workers who are risk lovers. Thus at each level of safety the slope of indifference curve of risk averse workers will be steeper than for workers who are risk lovers.

wage Risk lover Risk averse Slope = Marginal rate of substitution between wage and safety safety