Economics of Education and Work Incentives

An argument connecting human capital theory with the ‘weak version’ of the signaling hypothesis, is advanced initially. It is an argument that helps methodologically the derivation of a work‐incentives view of the complementarity between human capital theory and the strong version of the signaling theory. This view implies in turn that work incentives have only an income effect, which emerges as the solution to a moral hazard problem concerning the disclosure of productivity‐augmenting capabilities to the employer. Thus, it is concluded that policy‐induced disincentives, working against this effect and involving perhaps a substitution effect, too, would have serious repercussions on the productivity of labor unless employees and employers take measures to counteract the disincentives.