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Singaling - 10.24.2007 Midterm II Chapter 5 Minimum wage...

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10.24.2007 Midterm II - Chapter 5 - Minimum wage - Chapter 6 - Chapter 7 Signaling Continued: - High-ability workers vs. Low-ability workers example o Firms don’t know an individual’s ability, but they do know how many there are of each ability o TABLE I If firms knew the types of ability and who was who, would pay each type their worth Low type would receive some low wage: 000 , 200 = L w High type: 000 , 300 = H w o Since firms don’t know who is who, pay same wage to all (avg. of wages) ) 1 ( 000 , 300 000 , 200 q q w - × + × = For example: if q=60% W=200,000(.6)+300,000(.4)= 240,000 o Low productivity workers like this because they’re overpaid o High productivity workers don’t like this because they’re underpaid o Firms dislike this because they can’t assign only high types to high tasks and only low types to low tasks - Signaling eliminates the problem because it shows what types the workers are o If you have at least a certain level of education then the firm will know you are a high type -
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