Question

Question 3. Signalling

Suppose there are two types of workers with High and Low productivity

 High-productivity worker’s marginal product is 50

 Low- productivity worker’s marginal product is 20

(a) Suppose 50% of workers have high productivity, if the employer cannot identify the type of worker (pools them together), what would the wage rate be?

(b) Will high productivity workers be willing to work for this wage? Justify your answer.

(c) Will low productivity workers be willing to work for this wage? Justify your answer.

(d) Suppose workers can acquire education

(e) which cost 10euro per unit for high productivity workers, and 20 euros for low productivity workers. For what range of levels of e can the high productivity workers signal their ability

Answer 1

a) in this case all the 50% workers will be paid eqaul wages because In equilibrium, if firms can distinguish among types (low and high ability) then workers must be paid equal to their marginal revenue product. (Firms must make zero economic profits)

b) no, high productivity workers will not be willing to work at this wage rate because the high-ability workers have incentives to transmit information ;

Market responses to the problem of adverse selection:

i. Signaling: Informed individuals (workers) choose their level of education to signal information about their ability to uninformed parties (the frms)

ii. Screening: Uninformed parties (firms) take steps to screen the various types of individuals on the other side of the market (workers)

c) yes the low productivity workers will be willing to work at this wage rate because In this economy, low–ability workers acquire no education and receive the low wage, and the high–ability workers acquire education and receive the high wage. And this is an equilibrium as no one has an incentive to deviate

d) high productivity workers can signal their ability better than before for sure becasue according to this model People who attend additional years of schooling are more productive and since high productive model are called so because of their educational level only and if they spend more on their education will definitely increase their productivity