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Job Market Signaling Summary

This document summarizes Michael Spence's 1973 paper on job market signaling. Spence's paper explores how education can act as a signal of worker productivity even if education provides no actual skills. Employers use education as an indicator of ability when hiring since true ability is unknown until after hiring. Spence found that when the costs of education are negatively correlated with productivity, high-ability workers will obtain more education to distinguish themselves. However, Spence's initial study left several open questions about signaling games and equilibria that require further research.

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1K views2 pages

Job Market Signaling Summary

This document summarizes Michael Spence's 1973 paper on job market signaling. Spence's paper explores how education can act as a signal of worker productivity even if education provides no actual skills. Employers use education as an indicator of ability when hiring since true ability is unknown until after hiring. Spence found that when the costs of education are negatively correlated with productivity, high-ability workers will obtain more education to distinguish themselves. However, Spence's initial study left several open questions about signaling games and equilibria that require further research.

Uploaded by

TARKAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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SAMMY MARWA

JOB MARKET SIGNALING SUMMARY

An example of signaling is where employees send a message about their ability to

perform a job or work through their credentials attained by attending colleges or undertaking a

particular training. Employers distinguish capabilities of employees vide their educational

background or credentials. Consequently, employers tend to sell their services via a wage

assigned per job which in return motivates prospective employees to work towards attaining

those credentials assigned to a particular wage.

This paper is about markets in which signaling takes place and in which the primary

signalers are relatively numerous and in the markets sufficiently infrequently that they are not

expected to invest in acquiring signaling reputations. (Spence, 1973). The author aim of the

study is to present the outline signaling model. Spence considers hiring by employers as a

signaling under uncertainty because when an employer is hiring an employee even though they

may have educational credentials it is not possible to determine their productivity until after they

have worked for a company for some time. Even after hiring employees there is need to train

them and there is a possibility that bad employees or non performing employees will hide under

the good ones. However, credentials help employers to distinguish between low ability

employees and high ability ones during the recruitment process. Spence, (1973) assumes that

hiring a new employee is analogous to buying a lottery ticket without knowing if you will win

until one scratches it. The cost neutral employer is considered for the purpose of the study and it

is assumed that the costs of signaling are negatively correlated with productivity.
Findings

Spence, (1973) found that even if education did not contribute anything it could still have

value to both employee and employer. And If the appropriate cost/benefit structure exists "good"

employees will buy more education in order to signal their higher productivity. However, the

following questions remain unanswered after Spence’s study in 1973.

1. What is the effect of cooperative behavior on the signaling game?

2. What is the informational impact of randomness in signaling costs?

3. What is the effect of signaling costs that differ systematically with indices?

4. How general are the properties of the examples considered here?

5. In a multiple-market setting, does the indeterminateness of the equilibrium remain?

6. Do signaling equilibria exist in general?

7. What kinds of discriminatory mechanisms are implicit in, or interact with, the informational

structure of the market, and what policies are effective or ineffective in dealing with them?

This creates a need for further studies into the topic by upcoming scholars to fill into the vacuum.

Reference

Spence, M. (1973). JOB MARKET SIGNALING. Quarterly Journal Of Economics, 87(3), 355-

374.

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