Topic #3 Wage Differentials

Compensating

Compensating wage differentials are where people are paid more for dirty, dangerous, difficult, or dishonorable work. Well focus on how much more people get paid for dangerous worker where there is a risk of death on the job. The policy implications of this analysis pertain to safety regulations. If all working conditions were the same, then employees would work at the job with the highest wage. But, jobs differ. We will e amine the way they differ in terms of wages and the incidence of being fatally injured on the job. !"Bob !"Bart # # ! Bob ! Bart Wages

$isk of %eath on the &ob Indifference cur'es connect all the wage(safety combinations that yield the same utility. We assume three things about our indifference cur'es. )irst, we assume that employees ma imi*e utility, not income. +econd, we assume they ha'e perfect information about the wages and risk in'ol'ed with each job. Third, we assume that workers are mobile and can change jobs without cost. Bob and Bart ha'e different preferences. Bob has fi'e young children, he takes care of his in'alid mother, and he lo'es to play sports. Conse,uently Bob is more risk a'erse. Therefore, Bob is willing to gi'e up more in terms of wages to be safer. Bart is less risk a'erse. Bart has no family, no hobbies, but he enjoys sa'ing money. %angerous work is fine - Bart is willing to work dangerous jobs to earn more money.

.otice that the marginal rate of substitution between wages and risk changes along the indifference cur'e. /t point /, the worker is not willing to gi'e up much in terms of wages to be safer because danger is practically nothing but the wage rate is relati'ely low. /t point B, the worker is willing to gi'e up a lot in terms of wages to be made safer because the worker is in relati'ely imminent danger. Thus, indifference cur'es should be con'e 0where the marginal rate of substitution increases as you mo'e from left to right1 because of a diminishing marginal rate of substitution. That is, the wages were willing to gi'e up in order to be made safer decreases the safer we become. U Wages b WB

a W/ $isk/ $iskB $isk of %eath on the &ob Isoprofit cur'es identify all the wage(safety combinations that yield the same le'el of economic profits. We assume three things about isoprofit cur'es. )irst, we assume that safety costs money. +econd, we assume that firms will earn *ero economic profits 0along their *ero economic profit isoprofit cur'e1 in a long(run e,uilibrium. Third, we assume that other job characteristics are the same - the only things that 'aries across jobs are wages and safety. )irms that are able to eliminate danger relati'ely easily - at minimal cost - offer jobs that are safer and therefore ha'e flatter isoprofit cur'es. )irms that are not able to eliminate danger as easily - only at substantial cost - pro'ide jobs that are more dangerous and therefore ha'e steeper isoprofit cur'es.

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Wages

.+2+ 0negati'e profits1 .+2+ 0*ero profits1 .+2+ 0positi'e profits1 B345+ 0negati'e profits1 B345+ 0*ero profits1 B345+ 0positi'e profits1

$isk of %eath on the &ob If firms offer la'ish combinations of wages and safety, theyll lose money and be dri'en out of business with negati'e economic profits. If they offer meager combinations of wages and safety, then they will not be able to attract employees and will not be able to produce. The economy is at an e,uilibrium when all firms are earning *ero economic profits offering wage(safety combinations that are just high enough to attract workers but not so high that negati'e economic profits are being earned. If a firm spends more on safety, it must spend less on other things, which includes wages, to keep profits constant along the isoprofit cur'e 0and at *ero in a long(run e,uilibrium1. Isoprofit cur'es are conca'e6 easy to sol'e safety problems are taken care of first because it is not as costly to reduce danger initially. /s diminishing returns to safety set in, it is more costly to continue reducing the chance of injury. In fact, it may not be possible to completely eliminate the chance of injury on the job. !nder *ero economic profit conditions, Belks offers a lower wage because their job is safer. The night security guard ser'ice 0.+2+1 must pay a higher wage because it is more dangerous.

!7Bart !7Bob Wages WBart !"Bob !#Bob

!"Bart !#Bart

.+2+ 0*ero profits1 B345+ 0*ero profits1

WBob

$iskBob

$iskBart $isk of %eath on the &ob

We can now match employers and employees. Bob works at Belks and Bart works as a night security guard. 8atching is nice for the workers because they ma imi*e utility Bob gets more safety and Bart gets higher wages. It is also nice for employers because those who ha'e dangerous jobs can attract employees. .ote that wages increase with risk. +afe firms get employees who 'alue safety because they ha'e a comparati'e ad'antage in being able to reduce the risk of injury. $isk(prone firms compensate for higher risk with higher wages to people who are not 'ery risk a'erse.

In reality, there are many firms offering many different wage(safety combinations. The most attracti'e wage(safety combinations make up the offer cur'e. The consumer picks the wage(safety combination that ma imi*es utility. .otice that combination a does this, and it is on the :offer cur'e. .ote that combination c is also on the offer cur'e, but it does not ma imi*e utility. /nd, bundle b is under the offer cur'e, so it is possible to find a job with either higher wages, less risk, or a combination of higher wages and less risk. Thus, combination b certainly does not ma imi*e utility. !7 !" !# !;

Wages W/,WB WC
a b

$iskC

$isk/

$iskB $isk of %eath on the &ob

The theory of compensating wage differentials may not produce outcomes that are optimal for society. That is, though indi'iduals think that they are ma imi*ing utility, their selected wage(safety combination may not be best for society. This would occur, first, when e ternal people 0such as other family members or ta payers in society who support disability programs1 are ad'ersely affected by a workers choice of risk. +econd, sometimes workers do not know what is best for themsel'es. <erhaps workers do not rationally consider the danger in'ol'ed. )or e ample, bike helmets significantly reduce the probably of paralysis in accidents. =owe'er, few were bike helmets. >r, smokers continue to smoke though the know the long(term health conse,uences. Third, perhaps there is not perfect information about job(related risk. )or e ample, we only recently learned that asbestos can cause cancer. .e t, consider safety regulations. In the figure abo'e, what if the go'ernment began mandating a risk le'el of no more than riskB. Then, this would ha'e no effect on the modeled consumer. If the go'ernment mandated a risk le'el of no more than riskC, then the consumer would ha'e to mo'e from wage(safety combination a to wage(safety combination c. Conse,uently, the consumer would be worse off because combination c is on a lower indifference cur'e that yields less utility. But, what if the worker thinks he is at combination a but is really at combination b because imperfect information about danger. Then, if the go'ernment regulated a safety le'el of riskC, the worker might think he is worse off 0because combination c is on a lower indifference cur'e than combination

a1, when, in fact, he is really better off 0because combination c is on a higher indifference cur'e than combination b1. In #@A;, the >ccupational +afety and =ealth /ct was passed, creating >+=/. >+=/ penali*es employees who are not sensiti'e to risk and who appreciate higher wages because employees bear the cost of safety standards in the form of lower wages. The figure below represents the matching process between /nna &ane and fi'e employers that occurs when working conditions differ across jobs. The cur'es labeled B!iC are /nna &anes indifferences cur'es, while the cur'es labeled BIiC refer to *ero(economic profit isoprofit cur'es for fi'e firms - firm /, firm B, firm C, firm %, and firm 3. +uppose that /nna &ane is well informed about the wageDrisk combinations offered at different workplaces and that she ma imi*es utility. Bundles , y, and * represent some of the many wageDrisk combinations a'ailable. )igure 7 U3 U2 U1 U0

Wages $5.50 $5.00

x y z

IFirm E IFirm D IFirm C

I)irm B I)irm /

;.#E

;."E

;.7E $isk of %eath on the &ob

/ssume all fi'e firms offer /nna &ane a job. /nna &ane will work for firm B at bundle y because it offers the wageDrisk combination on the highest possible indifference cur'e 0!"1. .ow assume that >+=/ passes new regulations stating that no firm can ha'e a risk le'el greater than ;.#E. /ccording to the figure, /nna &ane would be willing to pay less than F;.?; for a risk le'el of ;.#E. /nna &ane will now work for firm / at bundle and will be worse off because bundle y is on a higher indifference cur'e than bundle . $egulations potentially increase utility when indi'iduals (i) dont ma imi*e utility, (ii) arent mobile, and (iii) dont ha'e perfect information.
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=edonic Wage Theory. Were still assuming that employee benefits cost money, *ero economic profits are earned in a long(run e,uilibrium, and that other job characteristics are held constant. /lso, were still assuming that consumers ma imi*e utility but not income, that consumers are mobile, and that consumers ha'e perfect information. Wages 9;,;;;

F";,;;;

F";,;;;

F9;,;;; 3mployee Benefits

3mployees choose between F9;,;;; in wages, F9;,;;; in fringe benefits 0such as a company condo, a company car, a pension plan, health insurance, country club membership, etc.1, or any combination in between. <ayments in kind are compensation in the form of a commodity. %eferred compensation is compensation paid to the employee later. /ccording to the figure abo'e, the employee ma imi*es utility with F";,;;; in wages and F";,;;; in fringe benefits. .ow, suppose income ta es increase, so that the ma imum in wages one can recei'e is only F7;,;;;. /lso, suppose such ta es do not affect employee benefits because such benefits are ta deductible. The budget constraint would pi'ot downward along the wage a is, and the worker would select a new combination of wages and fringe benefits.

Wages 9;,;;;

F";,;;;

F";,;;; F9;,;;; 3mployee Benefits If the go'ernment mandates that employers offer benefits and that employees take them, then mandating benefits will either ha'e no effect or will make consumers worse off. )or e ample, suppose +usan ma imi*es utility with F";,;;; in wages and F";,;;; in employee benefits. If the go'ernment mandates that employers offer and employees take F7;,;;; in employee benefits 0indicated by :mandate below1, then consumers like +usan must mo'e to a wage(benefits combination that yields less utility on a lower indifference cur'e. Wages 9;,;;;

F";,;;; !" !#

F";,;;;

8andate

F9;,;;; 3mployee Benefits

Problem Set #3 Wage Differentials

Compensating

#. )igure # represents the matching process between employers and employees that occurs when working conditions differ across jobs. The cur'es labeled /# and B" refer to indifference cur'es between the wage and risk for two indi'iduals, while the cur'es I and J refer to isoprofit cur'es for two firms. +uppose that both workers are well informed about the wageDrisk combinations offered at different workplaces.
)igure # /# Wage J
a

B"

#"."? H
c

A 9 I " J

9 H $isk 0deaths per #;,;;; workers1

a) +uppose that person B is mobile, but person / is constrained to work only for firm J. If firm J offers the wage and risk combination indicated by point a 0riskKH, wageK#"."?1 to all workers, what effect does the lack of alternati'e offers ha'e on person /s le'el of utility 0relati'e to what could be attained if person / was mobile1. b) 2i'en the situation in part a, what effect would a regulation that reduced risk to 9 deaths per #;,;;; workers ha'e on worker /s le'el of utilityL c) What effect would a regulation that reduced risk to 9 deaths per #;,;;; workers ha'e on person Bs le'el of utilityL Would the effect of the regulation be better or worse if B was constrained to work for employer JL ". )igure " represents the matching process between employers and +ue that occurs when working conditions differ across jobs. The cur'es labeled /#, /" and /7 refer to indifference cur'es between the wage and risk of injury for +ue. The cur'e >C refers to the offer cur'e formed by the isoprofit cur'es of many different employers. The matching process shown in )igure " assumes that the worker is perfectly mobile but imperfectly informed about the degree of risk associated with a particular job. In particular, suppose that +ue recei'es a wage of appro imately F#;.G; and thinks that she is being e posed to a risk le'el of 7 deaths per #;,;;; workers 0point a1 when in fact the actual le'el of risk is A deaths per #;,;;; workers 0point b1. /lso, assume
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that the firms know the degree of risk actually associated with a particular job, but are not aware of the workers misconception. a) +uppose that the go'ernment does a study, learns about +ues misconception, and decides to regulate a reduction in risk. What would be the optimal le'el of risk e posure to allowL What wage would +ue recei'e when e posed to the optimal le'el of riskL b) What would be the lowest le'el of risk e posure the go'ernment could set without actually making +ue worse offL c) /ssuming the results of the go'ernment study are not made public, would +ue be in fa'or of a regulation limiting risk e posure to # death per #;,;;; workers per yearL d) .ow suppose the worker is perfectly informed and mobile. What wageDrisk combination would +ue chooseL e) Would a perfectly informed and mobile worker support a regulation limiting risk e posure to # death per #;,;;; workers per yearL
)igure " /7 Wage /# #;.G; H ?
e d a c b

/"

>C

>C # #.? 7 9 $isk 0deaths per #;,;;; workers1 A

7. )igure 7 represents the matching process between employers and employees that occurs when working conditions differ across jobs. The cur'e labeled /" refers to the indifference cur'e between the wage and risk of injury for =arold while the cur'e >C refers to the offer cur'e formed by isoprofit cur'es of many different employers. The matching process shown in )igure 7 assumes that =arold is perfectly informed and perfectly mobile. The utility ma imi*ing choice for =arold is a job with a wage of FH.;; and a risk le'el of 9 0point a1. .ow consider a regulation that would mandate a decrease in risk e posure to # death per #;,;;; workers. a) /ppro imately how much per hour would =arold be willing to pay for such a risk reductionL b) =ow much per hour would it cost firms to comply with the regulationL

#;

c) Would such a regulation pass a benefitDcost testL d) 3mpirical studies of compensating differentials attempt to measure the tradeoff between wage and risk 0holding all else constant1 based on peoples actual choices. In )igure 7, at =arolds actual choice, the rate at which =arold and =arolds employer are willing to trade off wage and risk is gi'en by the slope of the dashed line. What is the slope of this lineL e) In actually carrying out benefitDcost studies of 'arious safety regulations, the obser'ed tradeoffs between wages and risk are e trapolated to measure the benefits associated with the regulation. If the tradeoff between wages and risk implicit at point a is assumed to be constant for any change in risk, how much would one predict =arold would be willing to pay for a risk reduction to # death per #;,;;; workersL f) %oes the e trapolation in part 7 o'erstate or understate =arolds actual willingness to pay for such a risk reductionL Why does the difference occurL What are the implications for benefitDcost studies of safety regulationsL

)igure 7 /" Wage

>C H
c

G ? 9

>C # 9 $isk 0deaths per #;,;;; workers1

9. >n 8arch ";, #@@", The Wall Street Journal reported on an attempt by the Bush /dministration to change the way benefitDcost analyses of regulations are performed. +pecifically, when computing the cost of a regulation, the administration wanted agencies to take into account the reduction in income that the regulation brings about. The theory behind this suggested change, according to 5ip Miscusi, an economist not affiliated with the plan, was that Bregulations cost people money, and the poorer people become, the more likely they are to get ill or die early.C >ne study cited by the 4abor %epartment estimated Bthat each FA.? million of regulatory e penses could result in one additional death from lowered incomes.C In a letter to <resident Bush, twel'e %emocratic senators called the plan Bcruelly insensiti'eC and said that the plan

##

was based on Ba dangerous notion6 that /mericas working men and women ha'e to make a choice between their jobs and their health.C a) Was the premise of the proposed change soundL Was it insensiti'eL b) While the proposed change would affect calculations of the cost of regulations, the benefit calculations would basically be unchanged. /re there any factors that are typically left out of benefit calculations that perhaps should not beL ?. %eferred benefits such as pensions make up about 9E of total compensation. +uch plans, howe'er, can be 'ery costly to administer, particularly if they are defined benefit pension plans. <ensions can either be defined benefit or defined contribution plans. !nder a defined benefit plan, employers guarantee the employee a certain monthly payment upon retirement, and then it is up to the firm to make sure the money is put aside to make such payments in future years. =owe'er, under a defined contribution plan, employers simply put aside a certain amount of money each pay period for the employee who then in'ests this money subject to certain rules. %efined contribution plans are typically much easier to administer. %efined benefit plans, on the other hand, typically in'ol'e complying with a wide array of go'ernment regulations, and so the paper work associated with such a plan can be 'ery costly. a) =ow would an increase in the paperwork cost of pro'iding a pension plan be modeled using the hedonic wage theory of employee benefitsL b) /ssuming workers ha'e perfect information and are mobile, how would an increase in the cost of administering employee benefits affect the optimal mi of wages and employee benefits in the modelL G. >ne of the key issues in the debate o'er health care reform is the ta treatment of employee health benefits. Traditionally, such benefits ha'e not been counted as part of an employees ta able income. /lso, since these benefits are a business e pense, they tend to reduce the firms corporate ta liability. >pponents of the status ,uo argue that if employees had to pay ta es on the benefits, and if firms could not automatically deduct the cost of benefits from their income, both employees and employers might shop more carefully for health co'erage. If employers and employees pay greater attention to the cost of different plans, pro'iders of both health insurance and health ser'ices would face greater incenti'es to keep costs down. a) =ow would the hedonic wage model of employee benefits change if employees had to pay ta es on health care benefitsL b) =ow would the hedonic wage model of employee benefits change if employers could count only part of their health care e penses as a business e penseL c) =ow would changes in part a and b affect the optimal combination of wage and employee benefitsL A. >ne of the most widely publici*ed issues of the #@@" presidential campaign was the debate o'er the )amily and 8edical 4ea'e /ct. The legislation, mandating employers to

#"

pro'ide workers with up to #" weeks of unpaid lea'e to deal with special family circumstances, was appro'ed by Congress in +eptember, #@@" and then 'etoed by <resident Bush. +hortly after <resident Clinton succeeded <resident Bush, the bill was reintroduced in Congress and again it passed both houses. <resident Clinton signed the bill on )ebruary ?, #@@7, making it the first bill appro'ed under his administration. The legislation re,uired business with ?; or more employees to offer up to #" weeks of unpaid lea'e to any employee wishing to care for a new child, a seriously ill child, spouse, or parent, or to any employee that is seriously ill. /lthough the lea'e is unpaid, any health care co'erage the employee has must continue. >n return from lea'e, employees must return to the same or a comparable position. 3mployers do ha'e the right, howe'er, to e empt certain key employees from the law as well as employees who ha'e not worked #,"?; hours during the prior #" months. 8any companies ha'e e pressed the 'iew that the cost of complying with a lea'e policy is fairly insignificant. In cases where outside workers must be brought in, howe'er, it is important to note that temporary workers can often be less efficient than the workers they replace, or they may re,uire e tensi'e training to become as efficient. >n the other hand, supporters of the policy point to the increased producti'ity and loyalty that can result when employees feel the firm has policies sensiti'e to their needs. <erhaps the biggest fear firms ha'e about the policy is that it will open the door for additional go'ernment interference in a companys personnel policies, perhaps e'en leading to a re,uirement to pro'ide paid lea'e. This was one of the arguments mentioned by opponents of the bill at the time of <resident Bushs original 'eto. >ther predictions made by opponents of the bill include reductions in the ,uality of labor demanded, reductions in employee wages and benefits, and a disincenti'e to hire women during childbearing years. /t the time of his original 'eto, <resident Bush proposed that firms 'oluntarily adopting family lea'e measures be gi'en a ta credit as a way of increasing the incenti'es for firms and employees to 'oluntarily arri'e at satisfactory family lea'e policies. /lthough the cost of compliance with the program is small in many cases, it is also clear that for some firms, under certain circumstances, the adjustments necessitated by allowing family lea'e may in'ol'e more significant costs. a) !sing the hedonic wage model of employee benefits, illustrate the circumstances under which mandate family lea'e would make workers better off. !nder what circumstances would it make them worse offL b) !sing the hedonic wage model of employee benefits, analy*e <resident Bushs plan to pro'ide ta credits 0subsidies1 to firms 'oluntarily offering family lea'e. Would such a plan make workers better or worse offL

#7

Answers #3 Differentials

Compensating Wage

/nswer to ,uestion #6 a) The lack of alternati'es means that person / ends up on indifference cur'e /, which goes through point a instead of being able to reach a higher indifference cur'e. 2i'en the shape of /s indifference cur'e, it appears that /s ma imum utility would be attained near point c. To reach c, howe'er, / would ha'e to be able to mo'e and work for employer I. b) +uch regulation would make the immobile person / better off by allowing / to attain the le'el of utility associated with point b. c) The regulation would make B worse off by forcing B to point c, a point associated with a lower indifference cur'e. The regulation would, howe'er, be e'en worse if B were constraint to work for employer J, since that would re,uire a mo'ement to point b. /nswer to ,uestion "6 a) The optimal le'el of risk is that le'el associated with point c. The wage rate, howe'er, would fall from somewhere between F#;.;; and F##.;; to FH.;;. b) The lowest le'el of risk is that associated with point d. c) .o, +ue would not be in fa'or of such a regulation since +ue percei'es that she is on indifference cur'e /7. In this case, howe'er, mo'ement to point e does also lead to a lower actual le'el of utility. d) !nder perfect information and mobility, +ue should choose point c where the wage is FH.;; and the risk of fatal injury is 9D#;,;;;. e) .o, regulation to any risk le'el lower than 9 deaths per #;,;;; workers would make a fully informed and mobile worker worse off. /nswer to ,uestion 76 a) =arold would be willing to see the wage reduced from FH.;; to just under FG.;; from point a to point c. b) The cost of reducing risk can be seen in the wage reductions necessary to keep the firms competiti'e. In this case, the wage must fall from FH.;; to F9.;; for a cost of F9.;; per hour. c) .o, since the cost of F9.;; e ceeds the workers willingness to pay, which is slightly o'er F".;;, the regulation fails the cost(benefit test. =arold would be forced to a lower indifference cur'e. d) The slope is #. e) Based on point a, we predict that =arold would be willing to gi'e up F7.;; in wages for a reduction in risk from 9 deaths per #;,;;; to #. f) >'erestimates because the e trapolation ignores the con'e ity of =arolds indifference cur'es. Con'e ity reflects a decreasing willingness to pay for risk reductions as the workplace becomes safer. This means that cost(benefit studies may be biased in fa'or of finding that benefits e ceed costs.

#9

/nswer to ,uestion 96 a) The premise of the proposed change is essentially the theory of compensating differentials. $egulations to reduce risk force costly adjustments upon firms, and the result is lower wages. When people earn lower incomes, their spending on health care may be reduced, leading to more illness and earlier death. While it may sound insensiti'e to refer to a tradeoff between wages and risk, the fact is that safety cannot be achie'ed without cost. This forces workers to balance the desire for more safety against their desire for more income. b) Benefit computations often do not take into account the benefits from increased safety that would accrue to people not directly affected by the regulation, including those workers who will be employed in helping to make the workplace safer. /lso, the computations typically take worker willingness to pay for increased safety as gi'en. This ignores the con'e ity of indifference cur'es as well as changes in preferences and attitudes such regulations bring o'er time. /lso, one can argue that regulations leading to increased health and safety will help raise producti'ity and income since healthier and safer workers may work harder and ha'e better morale. /nswer to ,uestion ?6 a) Increased administrati'e costs should rotate the isoprofit cur'e for the firm inward. )or e ample, in the figure below, the firm initially is willing to trade off F?;; in wages for FA?; in benefits 0line ab1. =owe'er, if the benefits become more costly to administer, then the firm may be willing to trade off ?;; in wages for only ?;; in benefits 0line ad1. b) /n increase in administrati'e costs should lead to a reduction in employee benefits. In the e ample abo'e, the le'el of benefits falls from F?;; to F"?; 0point c to e1.

#?

Wages F?;; a

F7;;

c !#

F"?;

d F?;;

b FA?; 3mployee Benefits

/nswer to ,uestion G6 a) Ta ing health care benefits should lead to a flattening of the indifference cur'es in the hedonic wage model as the willingness to gi'e up wages for additional dollars of benefits should decrease. This is shown as an e ample below in the shape of the indifference cur'es from !# to !". b) /llowing firms to deduct only part of their health care e penses would increase the cost of pro'iding benefits relati'e to the cost of pro'iding wages. This would lead to steeper isoprofit cur'es for firms. In the e ample below, the isoprofit cur'e is shown rotating from line ab to ad. 0F?;; in wages for FA?; in benefits to F?;; in wages for F?;; in benefits after the change in policy1. c) Taken by itself, the flattening of the indifference cur'e should lead to more wages and fewer benefits. The steepening of the isoprofit cur'e should lead to fewer benefits and perhaps more wages. Taken together, this prediction would be for fewer benefits and more wages. This is shown abo'e from point c to e. Benefits decrease and wages increase. Wages F?;; F9;; F7;; c !# !" a e

d F?;; /nswer to ,uestion A.

b FA?; 3mployee Benefits

#G

a)

b)

8andated benefits potentially make workers better off in two situations. Consider a worker who is not mobile that recei'es a compensation package like point c in the e ample on the ne t page. $egulating an increase in benefits from F#;; to F";; would lead the worker to a higher le'el of utility e'en though wages fall from F9;; to F7;;. /lternati'ely, suppose the worker has imperfect information about the compensation package he or she is recei'ing. +uppose the worker belie'es the compensation package consists of point d when in fact benefits are only at the le'el consistent with point c. $egulating an increase in benefits to point e would make the worker better off. 8andated benefits can make a worker worse off if the mandate mo'es the worker past point f along isoprofit cur'e ab so that he or she ends up on a lower indifference cur'e. 8andated benefits also make a worker worse off if the worker is already at his or her optimal mi of wages and benefits 0point e1. The ta credit plan would reduce the cost of pro'iding benefits and cause a rotation of the isoprofit cur'e from line ab to line ag. Before, the firm could only trade off F?;; in wages for F?;; in benefits, but now it can offer FA?; in benefits for only F?;; in wages. This would allow all workers, e'en those that are perfectly informed and mobile, to mo'e to a higher indifference cur'e. The optimal point would now be point h, which in'ol'es F7;; in benefits and F7;; in wages. /n immobile or imperfectly informed worker might still not attain point h, but gi'en that the firms isoprofit cur'e has shifted out, the workers are likely to see more benefits offered and this will mo'e the workers to higher le'els of utility.

Wages F?;; F9;; F7;; a d c e f !" b F#;; F";; F7;; F?;; !# g FA?; 3mployee Benefits h !7

#A