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Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap

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  • Luis Santos-Pinto

Abstract

I extend Spence's (1973) signaling model by assuming some workers are overconfident - they underestimate their marginal cost of acquiring education - and some are underconfident. Firms cannot observe workers' productive abilities and beliefs but know the fractions of high-ability, overconfident, and underconfident workers. I find that biased beliefs lower the wage spread and compress the wages of unbiased workers. I show that gender differences in self-confidence can contribute to the gender pay gap. If education raises productivity, men are overconfident, and women underconfident, then women will, on average, earn less than men. Finally, I show that biased beliefs can improve welfare.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 11.07.

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Length: 44 pp.
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:lau:crdeep:11.07

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: signaling; education; self-confidence; wage compression; gender pay gap;

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