In the Roy model, a worker chooses between two occupations (A and B). The worker selects occupation A if...
AOccupation A pays a higher average wage
BThe worker's expected earnings in A exceed their expected earnings in B, given their individual skills
COccupation A has higher social status
DThe worker's parents were in occupation A
The Roy model is based on self-selection according to comparative advantage. A worker chooses the occupation that maximizes their individual expected earnings (or utility, in extended models). A person with strong mathematical skills but average verbal skills might choose engineering even if the average wage in law is higher, because their personal return in engineering exceeds their personal return in law. This individual-level selection based on comparative advantage, not average occupational wages, drives the model.
Question 2 True / False
Self-selection into occupations means that observed wage differences between occupations directly measure the causal effect of the occupation on earnings.
TTrue
FFalse
Answer: False
Self-selection confounds the occupation effect with the characteristics of who enters it. If the most talented and ambitious people self-select into high-paying occupations, the observed wage premium for those occupations reflects both the occupation's causal effect on earnings AND the pre-existing advantages of the people in it. A doctor earns more than a teacher partly because medical training increases earnings (causal effect) and partly because people with characteristics correlated with high earnings (high ability, long time horizons) select into medicine (selection effect). Disentangling these requires techniques like natural experiments or structural models.
Question 3 Short Answer
What is 'comparative advantage' in the context of occupational choice, and how does it differ from absolute advantage?
Think about your answer, then reveal below.
Model answer: Comparative advantage means being relatively better at one occupation compared to another, regardless of absolute skill levels. A person with absolute advantage in both law and plumbing (they would be a great lawyer AND a great plumber) still has comparative advantage in one — whichever offers the larger relative return given their skill profile. They should specialize in the occupation where their advantage is greatest, even if they could succeed in both. This drives efficient sorting: each person enters the occupation where their relative productivity is highest.
Comparative advantage in occupational choice is directly analogous to comparative advantage in international trade theory. A brilliant physicist who is also an excellent chef has absolute advantage in both occupations, but if their relative advantage is greater in physics (they are the world's best physicist but only a moderately better-than-average chef), their comparative advantage lies in physics. The earnings differential between their physics potential and their cooking potential determines the efficient allocation. The Roy model formalizes this intuition with sector-specific skill distributions.