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How to Identify and Estimate the Demand for Job Safety?

Zhang, Nan and Mendelsohn, Robert and Shaw, Daigee (2023): How to Identify and Estimate the Demand for Job Safety?

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The hedonic wage equation is the relationship between wages and job and personal attributes (such as safety and working experiences) when the labor market is in equilibrium. The estimated equations have often been used to measure marginal values of risk reduction (safety) (or the value of a statistical life) in the literature. To measure the nonmarginal value of risk reduction, we need to estimate the demand for safety equation. However, no paper has estimated the demand function for safety because identifying the demand function requires data from multiple labor markets, which is difficult to find within a country. Thus, most papers estimate the hedonic wage equation of a single labor market in a country. By taking advantage of a panel dataset regarding the labor market in Taiwan, we divide the labor market into three sequentially separated markets to solve the identification problem. We first estimate the hedonic wage equation for each labor market in the first stage. Then, we estimate the demand for safety in the second stage using the IV approach to address the endogeneity problem in the demand equation. The main contributions of this study are twofold: First, we point out that job risk is not endogenous in estimating the hedonic wage equation, which is different from most hedonic wage studies where job risk has always been taken to be endogenous following Viscusi (1978). Second, this is the first study that has successfully estimated the demand for job risk reduction in the hedonic literature. We find significant income and substitution effects: workers with higher potential income or exposed to higher risks exhibit a higher marginal willingness to pay (MWTP). We also find heterogeneity in MWTP: older workers have higher MWTP, while there are no significant differences between genders. We then conduct welfare analyses regarding nonmarginal changes in risks.

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