Job marketsignaling. Michael Spence

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1 Job marketsignaling Michael Spence

2 1. Introduction Thisessayisaboutmarketsin which signaling takes place signalersare relatively numerous in the market sufficiently infrequently that they are not expected to invest in acquiring signaling reputations

3 Iftheincentives forveracityare weak other means by which information transfers takeplace. Aim is to outline a conceptual apparatus within whichthesignalingpowerof theobservable personal characteristicscan bedetermined. Whatin theinteractivestructureof a market accounts for the informational content of these potentialsignals.

4 2. Hiring Hiring: Investment decision under uncertainty purchasing a lottery Assumption: the employer pays the certain monetary equivalent as wage. Certainmonetaryequivalentdependsontheobservable characteristics of the individual: Indices: unalterable attributes(race, sex, age ) Signals: are subjecttomanipulationbytheindividual (education )

5 3. Applicantsignaling Offeredwagehas as argumentssignalsand indices. Individuals select signals so as to maximize the difference between offered wages and signaling costs. Assumption: signaling costs are negatively correlated with productivity Prerequisite for an observable, alterable characteristic tobea persistentlyinformativesignalin themarket.

7 4. Definitionof equilibrium The system will be stationary if the employer starts out with conditional probabilistic beliefs that after one round are not disconfirmed by the incoming data they generated. Beliefs are self-confirming

8 5. Propertiesof informationalequilibria: anexample

9 Guess a set of self-confirming conditional probabilistic beliefs: If y<y*: Group I with probability=1 If y y*: Group II with probability=1

11 GroupI sets y=0 if1>2-y* GroupII sets y=y* if1<2-y*/2 1<y*<2 Infinite number of equilibria Equilibria not equivalent in welfare Increasesin y* hurtgroupii. SignalingmakesGroupI worseoff and can makegroupii worseoff too(itdependsonq and therelativesignaling costs). Education does not increase the marginal product but helpstoallocatetherightpeopletotherightjobs.

12 Other equilibria: assume Ify<y*: GroupI withprobabilityq 1 and GroupII with probability1-q 1 Ify y*: Group II with probability 1

13 GroupI sets y=0 if2-q 1 >2-y* GroupII sets y=0 if2-q 1 >2-y*/2 y*>2q 1 No data fory y*, so no disconfirmingdata Education conveys no information in this type of equilibrium.

14 There is also an equilibrium where everyone sets y=y*. Employer beliefs are Ify<y*: GroupI withprobability1 Ify y*: GroupI withprobabilityq 1 and GroupII withprobability1-q 1 y*<1-q 1 Education level conveys no useful information.

15 The negative correlation is a necessary but not sufficient condition for signaling to take place. Example: y={1,3} No valueof y* thatwillmakeitworthwhilefor Group II to acquire an education. Effectivesignalingdependsupontherebeinga sufficient number of signals within the appropiate cost range.

16 6. Informationalimpactof indices

17 Sex and productivity are uncorrelated. Theopportunitysets of menand womenof comparable productivity are not necessarily the same. Ifat somet menand womenare notinvesting in y in thesameway, thenthereturnstoy will be different in the next round.

18 Assume the following beliefs:

19 Possibility that men and women in different stable signaling equilibria and stay there. Example: Mensignaly=y*=1.1 ifin GroupI and y=0 ifin Group II. Allwomenset y=0 and y w *>2q1. w Allwomenwouldbepaidmore thanlower productivity men. From outside: women receive lower wages because of lack of education, which keeps productivity down

20 Conclusions A further range of phenomena from selective admissionsproceduresthroughpromotions, loans and consumer credit lends itself to analysiswiththesamebasicconceptual apparatus.

The Quarterly Journal of Economics, Vol. 87, No. 3. (Aug., 1973), pp

Job Market Signaling Michael Spence The Quarterly Journal of Economics, Vol. 87, No. 3. (Aug., 1973), pp. 355-374. Stable URL: http://links.jstor.org/sici?sici=0033-5533%28197308%2987%3a3%3c355%3ajms%3e2.0.co%3b2-3