When applied to the labour market, the adverse selection model suggests that:
A)relatively talented workers are more likely to remain with a particular firm if the firm cuts the wages it pays
B)firms have perfect knowledge about the ability of workers
C)a firm may choose to pay an above-equilibrium wage to attract a better mix of workers
D)all workers have identical abilities

Question

Quizplus · Accepted Answer

The adverse selection model suggests that there is asymmetric information between employers and employees, with employers having imperfect knowledge about the abilities of workers. This can lead to the problem of adverse selection, where employers may end up hiring and/or retaining less talented workers at a given wage rate. One way to mitigate this problem is for the firm to pay an above-equilibrium wage, which can act as a signal to attract better-quality workers. Therefore, option C is the best choice in this scenario. Option A is not necessarily true, as relatively talented workers may be able to find better-paying jobs elsewhere and leave the firm if their wages are cut. Option B is incorrect as firms do not have perfect knowledge about the ability of workers. Option D is also incorrect, as workers may have different abilities and employers may not be able to distinguish between them.

When Applied to the Labour Market, the Adverse Selection Model