15 Human%20Capital%203

# 15 Human%20Capital%203 - PS 3 Due Today Today Signaling...

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 PS 3 Due Today Today Signaling Model of Schooling On-the-Job Training
    Ex: Two types of workers (HS grads): Low Productivity: PV of Lifetime Prod. = 200,000 (50%) High Productivity: PV of Lifetime Prod. = 300,000 (50%)

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    Ex: Two types of workers (HS grads): Low Productivity: PV of Lifetime Prod. = 200,000 (50%) High Productivity: PV of Lifetime Prod. = 300,000 (50%) If firms can not tell them apart pay their expected worth Expected productivity = 0.50*200,000 + 0.50*300,000 = \$250k
    Ex: Two types of workers (HS grads): Low Productivity: PV of Lifetime Prod. = 200,000 (50%) High Productivity: PV of Lifetime Prod. = 300,000 (50%) If firms can not tell them apart pay their expected worth Expected productivity = 0.50*200,000 + 0.50*300,000 = \$250k High types are “underpaid” Job match greater productivity, good for H and firms

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    If H types can signal their ability, firms can pay both types according to their productivity
    If H types can signal their ability, firms can pay both types according to their productivity What are the requirements for such a signal?

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    If H types can signal their ability, firms can pay both types according to their productivity What are the requirements for such a signal? It must separate – H finds it worthwhile to do it, but L does not Signal has Benefit (higher pay) and Cost For H: PV of Signal > PV of Not signal For L: PV of Signal < PV of Not signal
    If H types can signal their ability, firms can pay both types according to their productivity What are the requirements for such a signal? It must separate – H finds it worthwhile to do it, but L does not Signal has Benefit (higher pay) and Cost For H: PV of Signal > PV of Not signal For L: PV of Signal < PV of Not signal Educational attainment can be this signal!

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    Assume school costs H-type \$20,000/year and L-type \$30,000/year Assume firm pay both types their PV of productivity if it can separate
Assume school costs H-type \$20,000/year and L-type \$30,000/year Let r = 0 for convenience Assume firm pay both types their PV of productivity if it can separate Step 1: How much schooling must be required so L-type won’t go? \$200,000 > \$300,000 - \$30,000*S

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## 15 Human%20Capital%203 - PS 3 Due Today Today Signaling...

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