Derive values of wages to ensure that skilled want to work


Suppose that your firm wants to hire only skilled workers, but it cannot detect a worker's skills until after the first period of employment. Workers can work for you at most two periods before retiring. In the general labor market, skilled and unskilled workers earn WS > WU respectively. Workers maximize the sum of wages over the two periods of their working lives. Suppose that the firm designs a probation program under which new hires earn a wage W1 in period 1, and if they are not fired at the end of period 1 they earn W2 in period 2. Derive values of these two wages that will ensure that the skilled will want to work for your company while unskilled workers will be indifferent between working for your firm or any other firm. Show your work.

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Microeconomics: Derive values of wages to ensure that skilled want to work
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