Acceptance wage function

Also included in Table 3-2 are the acceptance wage function for the most risk-averse (a = 0.98) and the least risk-averse (a = 0.96) workers and the offer wage function for firms with the most productive (p = 1) and least productive (p = 0.1) safety equipment. Acceptance and offer wage functions represent the monetized value of the indifference and isoprofit curves in wage/risk space. We derived asking and offer wages using the level of utility or profit for a completely safe... 

Worker welfare rises if the new wage function intersects the original equilibrium acceptance wage ( j in Figure 2.4). 

Acceptance Wage s the shadow value of the iso-utility function for workers with risk aversion given by a particular value of a and tc = 0. Offer Wage = the iso-profit function value for firms with safety productivity given by a particular value of p and 7i = 0. 

Table 3-2 also presents calculations for risk compensation using the continuous version of the model. Results for the discrete version are comparable. Risk compensation is the slope of the wage function evaluated for a 1 in 1,000 increase in the probability of a work-related injury. Risk compensation ranges from 1,054 to 1,315 or from 3 to 4 percent of wages in Table 3-2. Thaler and Rosen (1975) estimated that approximately a 3 percent increase in wages is needed to get a worker to accept a 0.001 incremental probability of death. In his review article Smith (1979) reported percentage differentials in risk compensation across studies ranging from 1 to 20 percent, with the majority in the 2 to 4 percent range. Thus, our numerical simulations produce a compensation for the risk of a work-related injury that corresponds well with estimates in the empirical literature.

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