9b. Signaling in the Labor Market Flashcards
What is the problem of asymmetric information in the labor market?
- Prospective employees may have less information about working conditions than firms do.
- Firms may have less information about potential employees’ abilities than the workers do
What is the “education as a signal” model?
- Employers want to hire capable workers but cannot tell if a potential employee has high or low ability
- Going to college and graduate takes effort/ costly
- Two type of students: high-ability and low-ability
–> Studying takes less effort to the high-ability student
So, if high-ability people are more likely to go to college than low-ability people, schooling signals that ability to employers
What are some extreme assumptions of the “education as a signal” model?
- Graduating from an appropriate school serves only as a signal of ability
- Schooling provides no training that is useful to firms
How is the share of high and low ability workers expressed?
How is the output of high and low ability workers expressed?
What are the two potential situations (equilibria)?
- Pooling equilibrium
- Separating equilibrium
What is the “pooling equilibrium”?
No students go to school, employer offers to pay all employees
0wh (percentage of high-value workers multiplied by high wage)
(1-0)wL (percentage of low-value workers multiplied by low wage)
-> essentially the expected value calculation!
What is the “separating equilibrium”?
High ability students graduate and low ability students do not go to school, employer offers Wh to high ability and WL to low ability workers.
So.. school is a SIGNAL of ability, so employers can tell between the ability levels
What is the necessary condition for the separating equilibrium?
It must be the case that the high-ability person chooses to get a degree, so the difference between the wages must be GREATER than the cost to attend a school “c”
What is the necessary condition for the pooling equilibrium?
be the case that it does NOT pay for the high-ability person to get a degree
How can the pooling equilibrium be rearranged?
When is ONLY the pooling equilibrium possible?
When is ONLY the separating equilibrium possible?
When are BOTH equilibrium possible?
If c = $15,000, Wh = $40,000, and WL = $20,000, for what values of theta is pooling an equilibrium?
