2. Explain the difference between the human capital and signaling theories of ed

Question

2. Explain the difference between the human capital and signaling theories of education.

3. Identify whether each of the following raises labor demand or lowers labor supply (includes slowing labor supply growth) in labor market X.

Increase the minimum wage for workers less skilled than labor market X.

Pass laws prohibiting children from working in labor market X.

Require a license to work in labor market X.

Increase tariffs on imports that compete with labor market X employers.

Limits on immigration for those who might work in labor market X.

Buy American campaign run by workers in labor market X.

4. What is the most common way modern labor unions use to raise wages? This will result in the fewest jobs lost if labor demand is elastic or inelastic? This will result in the most number of new worker entries if labor supply is elastic or inelastic?

5. Briefly describe each of the 4 main pieces of labor legislation.

Explanation / Answer

While the human capital model suggests that schooling increases
productivity and therefore earnings, the signaling model postulates
that even if education does not increase productivity one may observe
a positive correlation of schooling and earnings if employers see
schooling as a signal for productivity.
Human Capital Model:
Schooling ) Productivity ) Earnings
Signaling Model:
Productivity ) Earnings
*
Schooling

The Signaling Model

Key aspects of the model:
1 Employers do not observe true productivity. They therefore have to rely
on education as a signal of true productivity.
2 Workers know their true productivity.
3 The cost of obtaining education must be lower for high productivity
individuals to ensure a separating equilibrium.
There are two possible equilibria:
1 Pooling equilibrium: every worker gets the same schooling and earns
the same wage.
2 Separating equilibrium: higher productivity workers get more education
and earn higher wages than low ability workers

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