Consider Kremers 0-ring model. There are 4 workers in this economy, Jack, Fred, Melbaand Daphne. Suppose that there are two firms and each firm hires only two workers ,each workers , each of whom has skill level equal to q (q is assumed to lie between 0 and 1, with 1 being the highest skill level. Two of the workers (Jack and Melba) are highly skilled (q = 0.9); the other two (Fred and Daphne) are less skilled (q = 0.3). Output is given by the product of the q-levels for example firm 1 might hire a high skill worker and a low skill worker. Output of this firm would be 0.9*0.3= 0.27
Calculate the total output that would be produced by these two firms under each of the following scenarios:
Firm A hires Jack and Fred and Firm B hires Melba and Daphne.
Firm A hires Jack and Melba and Firm B hires Fred and Daphne

Under which scenario is output highest?
(a) Repeat the above calculations but with highly skilled workers having a q value of 0.6 and low skill workers 0.5. How do your results differ from those in part a?
(b) What do these results suggest about sorting of workers in an economy?

  • CreatedAugust 05, 2013
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