Question

Suppose that a professor of labor economics claims that recipients of master’s degrees in economics gain little in terms of acquired productive skills from their graduate studies and alternatively, that the degree simply reflects a high level of existing mathematical talent.

Which item from the following list characterizes the labor economist's perspective on the link between education and wages?

Signaling
Compensating differentials
Human capital
The superstar phenomenon

Answer 1

The labor economist's claim that a master's degree in economics acts as a signaling mechanism highlights the signaling theory of education. This contrasts with the human capital theory, where education directly boosts productivity. Demand and supply analysis explains the rise in wages for high-skilled labor due to increasing demand outpacing the growing supply of college-educated workers.

Step-by-step explanation:

The labor economist's perspective as described suggests that they believe the acquisition of a master's degree in economics primarily serves as a signaling mechanism to employers rather than a means of significantly enhancing productive skills. This concept of signaling suggests that the degree signals to potential employers that the individual possesses a high level of mathematical talent, which is in demand in the labor market, rather than the education itself adding substantial value to the individual's productivity.

From the perspective of the demand and supply model, the increase in wages for high-skilled labor despite the substantial increase in the supply of workers with college degrees can be attributed to a greater increase in demand. This demand exceeds the growth in supply, shifting the equilibrium wage higher, from Eo to E₁, resulting in higher wages for individuals with advanced education, such as a master's degree in economics.