A new campaign “Cherish Life” has made millions of workers more averse to work in a risky environment. How does this affect labor market equilibrium of risky jobs?
A. Risky job demand curve shifts down and compensating wage differential decreases.
B. Risky job supply curve shifts down and compensating wage differential decreases.
C. Risky job demand curve shifts up and compensating wage differential increases.
D. Risky job supply curve shifts up and compensating wage differential increases.
The correct answer and explanation is:
The correct answer is D. Risky job supply curve shifts up and compensating wage differential increases.
Explanation:
The “Cherish Life” campaign has made workers more averse to working in risky environments. As a result, fewer workers are willing to take on these jobs, which directly impacts the supply side of the labor market for risky jobs. In economic terms, when workers are less willing to take on risky jobs, the supply of labor for those jobs decreases. This causes the supply curve to shift leftward or, in this case, “up” since fewer workers are available to work in these positions.
To incentivize workers to take on these more dangerous roles, employers will typically have to offer higher wages. This is called the compensating wage differential. The idea is that riskier jobs must compensate workers with a higher salary to make the job attractive. As the supply of workers in risky jobs decreases, employers must raise the wage to attract a smaller pool of workers. This results in an increase in the compensating wage differential, which is the extra pay offered to workers for accepting the additional risks associated with the job.
Therefore, the combination of a decreased supply of labor for risky jobs and the need to offer higher wages to entice workers leads to an upward shift in the supply curve and an increase in the compensating wage differential.