Suppose a worker is not actually very smart, but he has a graduate degree. The firm pays all workers with a graduate degree $50,000 per year, because it assumes they must be smart if they have a graduate degree. If they knew how smart he actually was, however, they would only pay him $40,000.

1. Suppose that we have data on how much this worker is paid over time. We see that he is paid $50,000 every year. What does this imply about the return to education being about signaling or human capital accumulation? Explain.

2. Suppose instead that he is paid $50,000 the first year, and then his salary falls by a few thousand dollars after the first year. What does this imply about the return to education being about signaling or human capital accumulation? Explain.