ECN 100B Lecture Notes - Lecture 10: Prevailing Wage
21 Mar 2018
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Suppose in a population of workers are low quality. Workers can work for themselves (e. g entrepreneurs or small self owned business) or can work in a firm. There is a large number of competitive firms. Willing workers are matched randomly to the firm. But employers cannot observe a workers skill level. (asymmetric information) Answer: for high quality workers to work in the firm the prevailing wage must be at least , at which the low quality workers would be more than willing to work. So, in equilibrium the firm cannot employ only high quality workers. Now suppose both types of workers can invest in education at personal costs of and. When only high ability people graduate from this education, and low quality people do not, education can be used as a signal toy the high type to differentiate themselves. Firms offer 4000 to educated and 3000 to not-educated. 400-100=390 (wage = 3000 work from home 3800)
