Screening in Labour Markets

Question 1

What is Screening?

Answer 1

Workers choose Education levels AFTER receiving an offer from the employer

Question 2

What does the existence of NE depend on?

Answer 2

Position of Market Average Zero Profit Line

- Horizontal line at wbar

Question 3

What is wbar?

Answer 3

Average Product of the 2 types weighted by their proportions in the population

Question 4

How is wbar calculated?

Answer 4

wbar = (nh MPh + nl MPl) / (nh + nl)

Question 5

When is there NOT a Separating NE?

Answer 5

If I.C for Uh = w* is Partially under wbar (Market-Av. Zero Profit Line)
- Possible to find new contract R that is preferable to both type + offers Supernormal Profits

Question 6

When can a Separating NE be found?

Answer 6

When wbar (Market-Av. Zero Profit Line) is everywhere fully BELOW I.C for Uh = w*
- No Profitable Deviation to be found
NE if: Uh (h, y) = h - ah yl ≥ Uh (wbar, 0) = wbar

Question 7

Can there be a Pooling NE?

Answer 7

There can NEVER be a Pooling NE

• Best Pooling Contract at T {wbar, 0}
• From here- Cream-skimming Contract can be found in Q
• This makes T Unprofitable –> All take up contract Q - becomes Unprofitable as well
• If Q is below wbar - Supernormal Profits –> Can’t exist in NE

Question 8

What is the Efficiency + Welfare impact of Asymmetric Info –> Selection Problem?

Answer 8

Separating Eq.: High type are Worse off than Full Info
Low Type are not worse off but also not better off than full info
Wilson Eq.: High type worse off- receive wbar
Low type better off - receive wbar
- High type Cross-Subsidise Low type