Which marginal productivity would be higherat current job

Reference no: EM13239474

The following question considers the possibility that employer-provided health insurance reduces job mobility-a phenomenon that has been termed job lock. Job lock prevents workers from transitioning to jobs in which their marginal productivity would be higher than at their current jobs.

Consider three workers with the following preferences:
Uij = Wij+ (70 × Hij)
Ukj = Wkj + (110 × Hkj)
Ulj = Wlj + (160 × Hlj)

where Wij is the wage at job j for worker i, Hij is an indicator variable (i.e., it takes on a value of one or zero) for whether or not employer-provided health insurance (EPHI) is offered to worker i at job j (so that Hij = 1 if the worker i at job j has EPHI). Assume that there are no employee copayments for the insurance and that the labor market is perfectly competitive. Workers i, k, and l all have a marginal product of $200. There are an arbitrarily large number of firms in the economy, and they cannot offer worker-specific compensation packages. If they provide EPHI to one worker, they must provide it for all their workers. EPHI costs firms $100 per worker. Assume that there is full employment-all three workers will be employed.

Assume that each worker chooses to work at the firm that gives him or her the highest utility. Because it is a perfectly competitive market, firms pay a total compensation package of $200, the marginal product of each worker. The firms' options are: they can either pay a wage of $200 and not offer insurance; or they can pay a wage of $100, and incur the $100 cost of insurance. For each worker, do they have EPHI?

Reference no: EM13239474

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