The Monetary Value of Job Characteristics

1
The Monetary Value of Job Characteristics

• The Value of Nonmonetary Compensation

2
What is the value of job aspects?

• Jobs differ along lots of dimensions
• prestige
• location
• kind of work - outside/inside riskiness
• flexible working hours
• autonomy
• Creativity
• Fringe benefits
• Perks

3
What is the value of job aspects?

• The market matches workers and jobs
• To get workers to accept job characteristics that
  they find distasteful, we need to pay them
  compensating differentials
• shift differentials for late night work
• risk premium for working on bomb removal
• Friendly co-workers
• Good fringe benefits

4
Hedonic Wage Theory

• Hedonic wages - each characteristic of a job has
  a dollar equivalent.
• This dollar equivalent will be determined in the
  market by the interaction of firms and workers

5
Who Pays for Benefits?

• Depends on 4 factors
• Value employees place on benefit
• Degree to which employers change hiring when
  compensation changes and degree to which
  employees change desire to work when compensation
  changes
• Whether cost only increases for firm or all firms

6
Who Pays for Benefits?

• Whether hiring decisions of firm affect market
  compensation level

7
Who Pays?
8
The Market

• Some firms can provide a job aspect cheaply it
  will be expensive to provide in other firms
• A safe job is easy to provide to an accountant.
  It is difficult to provide to a bomb remover.
• Construction work varies with the season and with
  the economy. Work for the government is usually
  very stable. It varies little

9
Comparable Salaries required to duplicate a home
owned in Champaign December 2002
10
The Market

• Some individuals value aspects differently
• Some would like a job with a responsible
  employer.

• Others dont care.

• Sometimes the value can be predicted. This
  creates a potential for sorting
• Young vs old
• Men versus women
• Sick versus healthy.

11
The Market Tradeoff

• Workers who value a characteristic more match up
  with firms who can provide it cheaply
• Workers who do not value the characteristic go to
  firms that cannot provide it cheaply

12
Application The Market for Safety

• OSHA 1970 - DOL responsible for standards and
  enforcement
• highest degree of health and safety protection
  for the employee
• How to choose? Point A or Point B?

13
Fatal Occupational Injuries/100,0002003 by
Industry
14
Fatalities by Occupation 2003
15
Cost-Benefit Analysis

• Improvement of safety comes at a cost - is it
  worth the cost?
• Not all improvements in safety are worth the cost
• Saccharin and diabetes
• Trips to Chicago

16
Optimal Level of Safety

• Balances the costs and benefits of the
  improvement in safety
• Costs - engineering reports on costs
• tend to be overstated by companies
• Benefits - reduction in injuries or deaths on the
  job.
• How can these be compared?

17
The Value of Life

• Hedonic wage theory risk on the job has a price
  in the market
• We can estimate this price
• wage differential studies on risky versus not
  risky jobs
• Sorting will occur Some workers will value risk
  differently from others. We must be careful to
  control for the characteristics of workers high
  income workers purchase safe jobs.
• The value that we get will not be the value for
  everyone.

18
The Value of Life

• Estimates use individual data combined with
  occupation or industry death rates
• Best current estimate 700 per 1/10000 reduction
  in prob(death) in a year
• Value of life70010000 7M

19
Optimal Value of Risk

• Introduce a safety measure if the value that the
  market gives for its benefits outweigh its costs
• Example
• Cost of safety measure is 3.5M. Assume that its
  life is 10 years, or 500,000/year for plant.
• 1000 workers in plant 500/worker/year

20
Optimal Value of Risk

• Example
• Benefits - Save .2 lives per year .2/1000
  reduction in probability of death
• Estimated value 700/10000 reduction
  70021400/worker/year
• 1400gt500 gt Benefits exceed costs
• The company should purchase the equipment on
  their own! (Why?)

21
Returns to a safe environment

• Wages will be reduced in the future
• Higher productivity
• Better workers for the same wage

22
Why should OSHA have to require the companies to
change?

• Forcing firms to provide a benefit may reduce the
  pay of their workers in the long run - that is
  bad.
• Government intervention should be based on
  market failure.
• Information asymmetry - when is this likely?
• The lemons problem (Insurance)
• Public goods (quality of the building)

23
HR Considerations

• Monetary compensation is not the only method to
  attract and retain workers.
• Companies can attempt to find the market tradeoff
  using data on wages and other aspects of the job
• Hay point evaluations
• Differential pay due to cost of living
• Firms can find it beneficial to improve the job

24
Benefits (Fringes)

• Value of benefits will also vary across workers
• It may be advantageous to allow workers to choose
  their own benefits (cafeteria plans)
• It may be bad to allow workers to choose
• Adverse selection

25
Why compensate with benefits?

• Firm has a cost advantage over the individual
• group health
• Econ of scale fixed costs of administration
• Lower risk as pool larger
• Solves adverse selection (experience rating)
• tax arbitrage
• Firm can take advantage of sorting

26
Why compensate with benefits?

• Employees can provide feedback on the quality of
  the product (discount provided)
• Employees can become more acquainted with the
  product (discount provided)
• Government mandate - FLMA

27
Pension Plans

• Two types
• Defined Contribution contribution each period is
  invested by employee. Value of the pension
  depends on the quality of the investments
  (expanding)
• Defined Benefit(majority of workers, but
  declining
• Pattern Plan - Pension(B) (years of service)
• if B1000, Pension30,000 for 30 years
• Formula Plan - Pension(G)(Years)(Salary Average)
• if G.02 get 60 of final average salary for 30
  years

28
Advantages of Plans

• Defined Benefit
• Value of pension payments known.
• Risk is small if there is inflation protection
• Gives incentives to work hard until the end if it
  is a formula plan since the last few raise
  increases are really important for pension
• U of I 2.6 for every year to max of 80 of last
  four years salary

29
Advantages to Plans

• Defined benefit plan can be designed to maximize
  benefit at a particular age - this gives
  incentives to retire without a max retirement
  age.
• Making mandatory retirement unlawful encouraged
  use of defined benefit plans

30
Advantages to Plans

• Defined contribution
• Shifts risk to the worker. Is this good?
• What happens if the worker manages her plan
  inefficiently?
• Encourages the worker to plan for retirement
• Easily portable from employer to employer
• May be good or not for employer good for employee

31
Advantages to Plans

• Encourages the worker to stay with the firm - but
  probably too long because value keeps rising.

32
Portability

• Defined Benefit - Too expensive for accepting
  firm (high salary)
• Defined Contribution - portable through a 3rd
  party (TIAA, unions)

33
Vesting

• Can be manipulated to reduce or increase
  turnover.
• Cliff vesting - essentially guarantees that
  everyone will retire at that date