Question

Two individuals, Ms. SMU and Ms. TCU, just graduated from college and are looking for jobs. Both individuals have only limited amounts of savings. As a result, their reservation wages are identical. However, Ms. SMU had the opportunity to take this class, so her skills are superior to those of Ms. TCU. Answer the following questions, providing graphs to demonstrate what is occurring where appropriate.

(a) How does the expected duration of unemployment compare across the two individuals?

(b) How does the wage each individual expects to receive compare across the two individuals?

(c) Once each has begun working, we observe that Ms. TCU is at a higher-paying job. How can you (or can you?) reconcile these facts with the job search model from class?

Answer 1

Answer a and b :-

In the above graph we can see that the demand of skilled workers that is greater than the demand of unskilled workers because the value of output produced by skilled workers will be better and thus it would fetch better prices in the market .

Thus due to higher demand of skilled workers they have a lower expected duration of unemployment as compared to unskilled workers .

The marginal cost of acquiring skills is higher than that of an unskilled worker thus the supply curve S1 of the skilled worker is onto the left of supply curve S2 of unskilled workers .

For acquiring better human capital in the form of skilled labour the companies pay higher wages to them to encourage them to supply more labour.

Answer c :-

The search theory suggests that workers search for the best job offers while firm search for employees to fill job vacancies. The workers will not accept any wages below the acceptance wage which equates the marginal benefit of continued job search with the marginal cost

The market efficiency increases in terms of productivity due to improvements of quality of labour .

In the above diagram MRP is considered constant over the persons work life .

Thus the unskilled workers pay is less than the MRP while the skilled workers pay is more than the MRP.

Now in the above case the unskilled worker has become senior and can pass his knowledge to less skilled workers. Technically he has attain skills while working on job and thus as per the rule due to his attained skills he will receive higher wages .