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r risk and they do not use resources to reduce risk than that, but instead they pay a wage that would compensate for the high level of injury. Therefore it is not profitable for the company X and have a higher injury level above point R', because then they have to spend even more resources to reduce the level of the injury, which would cause the difference in wage level after passing point R' and upward. So this means that if an employee can choose between point XR—— and YR——, they will choose point YR—— since these workers are working with a higher risk of injury, but prefer the higher pay as a reason to do the job. This YR—— is preferred by them (ibid: 255).

 

To see if the employee chooses to do the job or not, it is important to sketch both the worker's indifference curves and the employer's isoprofit curves. In the model 3, it is two employers called X and Y at zero profit curves, while two employees indifference curves which are called A and B.

 

Employee A maximizes the utility of working for employer X along the curve A2. The worker will then gain a salary equal WAX and also a risk level of RAX. The same applies to B he maximizes utility along the B2 by working for the employer Y. The salary he receives is WBY and risk level is RBY.

 

Worker A has the opportunity to choose the indifference curve A1. If he accepts the same as the individual B, where the salary would be WBY and risk RBY, he would have utility A1 which is less than A2. We can interpret the model 3 like that the person A value safety high and he values risk less, and he is willing to sacrifice wage in favour safety at work. By A1, he is not enough compensated (WBY) in relation to the risk level he must take at one time and thus he will avoid choosing A1.

 

Person B also has the option to choose the person A selected on the A2 curve. But he——s salary reduces considerably, while the level of risk also decrease, but person B is not willing to do that, because of his indifference curves that are flatter and he finds the offer by B2 with wages WBY and risk RBY much greater instead of A's option. Person B is not willing to take a pay cut or else this would put him on the B1 curve, which provides less benefit to the person than the B2 (Krueger Alan B. and Schkade D. 2007 : 25).

 

CHAPTER 3

 

LITERATURE REVIEW

 

Thaler and Rosen (1975)

 

Thaler and Rosen (1975) his paper is among the first attempts that try to estimate the value of a life based on the labor market. Their main question in the paper is 'how much a person is willing to pay to reduce the likelihood of his death by a small amount'.

 

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