Question

True/false/ambiguous. For each of the following, indicate whether the statement is true, false, or ambiguous, and briefly explain your answer. If your answer depends on any assumptions, state them clearly. Use graphs or equations to illustrate your answer whenever it is helpful.

1. A worker should never trust an implicit contract with an employer that pays them less than their marginal product when they first join the firm, but more than their marginal product after many years with the firm, because the employer has an incentive to fire the worker once their wage becomes higher than their marginal product.

2. If the signaling model of the relationship between schooling and earnings is correct, President Obama’s proposal to make community college free for two years could prove completely wasteful.

3. The human capital model predicts that wages across workers will become more equal as they get older, because investments on training while employed will offset initial differences in human capital investments in education.

4. To encourage workers to invest in specific human capital, employers have to pay workers more than their marginal product at the firm after the training is completed.

5. Extraordinarily high CEO pay need not reflect a ripoff of shareholders, but instead can be an optimal compensation scheme that firms use to maximize profits.

Answer 1