Suppose a worker is not actually very smart, but he has a graduate degree. The f

Question

Suppose a worker is not actually very smart, but he has a graduate degree. The firm pays all workers with a graduate degree $50,000 per year, because it assumes they must be smart if they have a graduate degree. If they knew how smart he actually was, however, they would only pay him $40,000.

1.Suppose that we have data on how much this worker is paid over time. We see that he is paid $50,000 every year. What does this imply about the return to education being about signaling or human capital accumulation? Explain.

2.Suppose instead that he is paid $50,000 the first year, and then his salary falls by a few thousand dollars after the first year. What does this imply about the return to education being about signaling or human capital accumulation? Explain.

Explanation / Answer

In the given case, though the worker is not very smart, but he got the job on the basis of his graduation. Because the firm believes that if he is smart enough to complete his graduation, he will perform on his job the way desired by the firms management. However, if the firm knew about his actual smartness, they may not pay him more than $40,000 rather than $50,000.

Scienerio 1:

After reviewing the data it has been determined that worker is paid over the time $50,000 every year.As per the theories of economic growth human capital accumulation is seen as an engine of growth. And if some workers lack in certain activities by interacting with others in team this disability can be changed and his performance can be improved. But in this case even after a year candidates performance does not match the desired performance, this imply that the human capital accumulation turned to be deficient in this case. Similarly, as per return to education theories education is supposed to produce positive externalities. However, there are sufficient proves that models of signaling value of education raise the possibility that some components of schooling are social waste, that appear to be true in this case.

Scienerio 2:

After the employee is paid $50,000 the first year, his salary falls by a few thousand dollars after the first year.In this case return to education being about signaling implies that the education of the worker does not pay for his social returns to education and are lower than the private returns.

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