Suppose years of education,Ed, is the only variable that affects earnings. The equations for the weekly salaries of typeA and type B workers are given by:

W_A= 600 + 10*EdandW_B= 500 + 13*Ed

On average, typeA workers have 12 years of education and type B workers have 16 years of education.

a) What is the average wage differential between typeA and type B workers in this labor market?

b) If both types face the same costs of acquiring education, does it make economic sense that type B workers get more education than typeA workers, on average, given these wage functions? Explain.

c) Using the Oaxaca decomposition, calculate the upper and lower bounds on the proportion of the wage differential in part a due to differences in average levels of education and the proportion due to differences in the returns to education (which may be due to discrimination), assuming that workers are paid according to their correct type.

Due to differences in average levels of education:

Due to differences in the returns to education:

d) Suppose that employers know there are two types of workers, A and B, and that A workers are more productive than B workers, on average. If they cannot distinguish between the two types of workers, does it make sense for them to use education as a signal of productivity if the two types of workers have the same costs of acquiring education? Explain why or why not.