In a labor-market pooling equilibrium with high-skill and low-skill workers and where a costly educational degree is used as a signaling device,all else equal,an increase in the wage differential between high- and low-skill workers leads to
A) an increase in the required minimum share of high-skill workers.
B) a decrease in the required minimum share of high-skill workers.
C) no change in the required minimum share of high-skill workers.
D) None of the above answers are correct.

Question

Quizplus · Accepted Answer

In a labor-market pooling equilibrium with high-skill and low-skill workers, an increase in the wage differential between high- and low-skill workers leads to an increase in the required minimum share of high-skill workers. This is because the costly educational degree becomes a more valuable signaling device, and employers become more willing to pay a premium for high-skilled workers. As a result, more low-skilled workers are incentivized to acquire the costly educational degree, which increases the supply of high-skilled workers and reduces the wage premium for high-skilled workers. In turn, this leads to a relative increase in the wage offered to low-skilled workers, making it more attractive for them to acquire the educational degree. This process continues until the required minimum share of high-skill workers is reached.

In a Labor-Market Pooling Equilibrium with High-Skill and Low-Skill Workers