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Signaling (Job Market Signaling)

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Signaling (Job Market Signaling)

Applied to the labor market, the idea is that firms have incomplete information about worker productivity, hence base productivity expectations, hence wages, on alterable "signals" such as education and unalterable "indices" such as race and sex. 

(Paco Martorell and Damon Clark, How Important is Labor Market Signaling? New Evidence from High School Exit Exams, at http://www.economics.utoronto.ca/index.php/index/research/downloadSeminarPaper/1950, accessed 30 May 2015.)

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The concept of market signaling, first proposed by Spence (1973), has added greatly to our understanding of markets characterized by incomplete information. The idea that education may signal labor market productivity has important education policy implications. In particular, since the signaling role of education could account for some of the private returns to education, signaling implies that these might exceed the social returns to education, the returns relevant to policy-makers. Yet the practical importance of education-based signaling is unclear. Many methods have been used to address this question, but conclusions vary across and often within the methods used.

(Paco Martorell and Damon Clark, How Important is Labor Market Signaling? New Evidence from High School Exit Exams, at http://www.economics.utoronto.ca/index.php/index/research/downloadSeminarPaper/1950, accessed 30 May 2015.)

Michael Spence's 1973 paper, Job Market Signaling, cited in his award of the Nobel Prize, can be found at http://smg.media.mit.edu/classes/Identity2004/JobMarketSignaling.pdf (accessed 30 May 2015).  

 

 


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