Suppose prospective clerical workers fall into one of two categories in equal numbers: high productivity (HP) and low productivity (LP). An HP worker’s value to the firm is $30,000 per year; an LP worker’s value is $20,000 per year. A firm hires workers who stay an average of five years.
a. At the time of hiring, the firm cannot distinguish HP and LP workers. In this case, what wage will it offer its new hires?
b. One option is for workers to attend college before taking a job. Suppose college has no effect on clerical productivity (its other virtues notwithstanding). For an HP worker, the expected total cost of attending a four-year college (accounting for possible scholarships) is $40,000. The expected cost for an LP worker is $60,000. Can HP workers effectively signal their productivity by attending college? What if the average job stay is only three years?