A construction company offers significantly higher wages to workers assigned to a hazardous job site compared to a similar role in a safer environment. What economic theory best explains this wage differential?

Question

BlackTom AI · Accepted Answer

In analyzing the wage structure described, we should consider how workers are compensated for non-minimal job characteristics.
Option 1: Agency Theory. This focuses on the relationship between principals and agents, highlighting issues like moral hazard and information asymmetry, not specifically about hazard-related wage differentials. While it can influence compensation structures, it does not directly explain higher wages for riskier jobs.
Option 2: Efficiency Wage Theory. This posits that paying workers above the market-clearing wage can raise productivity, reduce turnover, or improve effort. Although relevant to why wages might be above average, it does not account for the cost or risk factor of a dangerous job creating a differential linked to hazard itself.
Option 3: Compensating Wage Differentials. This concept states that workers require higher wages to accept jobs with undesirable attributes—such as greater risk, unpleasant conditions, or social stigma. The higher pay serves as compensation for the negative aspects of the job, fitting the scenario where hazardous sites command higher wages.
Option 4: Human Capital Theory. This explains wage differences in terms of investments in education, training, and skills. It does not specifically address why hazardous conditions would lead to higher wages, unless those conditions somehow correlate with higher training costs, which is not the central idea here.
Option 5: Tournament Theory. This explains wage structures in terms of ranking and promotion ladders inside organizations, where top relative positions earn more to incentivize effort. It describes internal wage differentials, not compensation for job risk per se.
Overall, the key mechanism at play in the scenario is that workers accept higher hazard due to the extra compensation required to offset risk and discomfort, which aligns with compensating wage differentials rather than the other theories. The other options either address different motivations for pay (quality of effort, training, internal promotions) or describe broader principal-agent dynamics without focusing on the hazard premium.

econ_448_120251_246250 Self-Assessment 1

A construction company offers significantly higher wages to workers assigned to a hazardous job site compared to a similar role in a safer environment. What economic theory best explains this wage differential?

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