Answer to Question 2:

Quasi-contracts between firms and workers guaranteeing stable employment for senior workers at stable real wage rates arise

1. because average wages are less variable than average profits.

2. because profits are less variable than wages.

3. because holding human capital is inherently more risky than holding non-human capital.

4. for all of the above reasons.

Choose the correct option.

Option 3 is the only one that leads to a true statement. The issue is not whether profits are more or less variable than wages, if the latter are allowed to fluctuate freely in response to the forces of demand. The issue is that human capital is more risky to hold than non-human capital because it is impossible to hold a diversified portfolio of different forms of human capital, but easy to hold a diversified portfolio of different types of non-human capital.

Even though workers as they grow older can invest in real estate and a portfolio of assets to provide security in retirement, a major fraction of the income from which such savings must come typically flows from a single rather narrowly defined set of skills.

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