Reply to Referee Report of September 5 September 5 , 2007

I thank the referee for reading the paper and for alerting me that I have to phrase things more carefully in order to avoid misreading. Main concerns 1. The entire point is based on misreading the paper. The referee interprets the reservation wage R as relating to the unemployed or people engaged in home production, whereas I have written (I quote the entire paragraph, where the reservation wage is introduced): To capture labor heterogeneity and skill latitude, we consider just two grades of labor, prolific and mediocre. Both types of workers, the mediocre and the prolific, can perform the task under consideration, but with different efficiency: The prolific workers are more productive. Firms can distinguish the types costlessly when they hire them. Further we assume that the alternative employment for both types of workers is such that individual productivity differences do not matter—think of a conveyor belt. Their wage in this standardized employment functions as a reservation wage for the labor market under consideration. It is denoted by R. There is no mentioning of the unemployed nor of people engaged in home production, and the paper does not relate to unemployment in any way. The misreading is maybe partially due to my poor way of expression myself. In a revised version, I shall try to improve the phrasing. 3. This should be resolved by considering that I tried to express a somewhat different idea from what the referee thought. Over-qualification means that people have qualifications that are not needed to perform the job they are holding. This would be the case for a person who obtained an education for a high-paying job (with wage rate W in the model) but works at a low-paying job (with wage rate R in the model)–an engineer at McDonald's for instance.