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The dual avenues of labor market signaling

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  • Waldman, Michael

Abstract

This paper explores interactions between the two main avenues through which worker ability is signaled in the labor market — education signaling and promotion signaling. The framework assumes that workers are endowed with values for both academic ability and productive ability, where these abilities are positively correlated but are not identical. Workers use education to signal academic ability but firms care about productive ability which is signaled through promotion decisions. The main analysis yields three returns to education signaling: i) a higher starting wage; ii) higher wages for non-promoted workers late in careers; and iii) a higher probability of promotion. The paper shows that when education and promotion signaling co-exist education signaling fares better from a social welfare standpoint than in models characterized by education signaling only. Also, in contrast to standard models of education signaling, in this analysis there are important education signaling returns late in workers' careers.

Suggested Citation

  • Waldman, Michael, 2016. "The dual avenues of labor market signaling," Labour Economics, Elsevier, vol. 41(C), pages 120-134.
  • Handle: RePEc:eee:labeco:v:41:y:2016:i:c:p:120-134
    DOI: 10.1016/j.labeco.2016.05.001
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    Cited by:

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    2. Dato, Simon & Grunewald, Andreas & Kräkel, Matthias & Müller, Daniel, 2016. "Asymmetric employer information, promotions, and the wage policy of firms," Games and Economic Behavior, Elsevier, vol. 100(C), pages 273-300.
    3. Nick Huntington-Klein, 2021. "Human capital versus signaling is empirically unresolvable," Empirical Economics, Springer, vol. 60(5), pages 2499-2531, May.
    4. Daniela Sonedda, 2020. "Guess who's there: employment protection legislation and the degree of substitutability between labour contracts," IAAEU Discussion Papers 202007, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    5. Jed DeVaro & Oliver Gürtler, 2020. "Strategic shirking in competitive labor markets: A general model of multi‐task promotion tournaments with employer learning," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 335-376, April.
    6. Ori Zax, 2020. "Human capital acquisition as a competitive response to the promotion distortion," Metroeconomica, Wiley Blackwell, vol. 71(3), pages 496-509, July.
    7. Dickmanns, Lisa & Gürtler, Marc & Gürtler, Oliver, 2018. "Market-based tournaments: An experimental investigation," Labour Economics, Elsevier, vol. 51(C), pages 294-306.
    8. Janssen, Simon & Mohrenweiser, Jens, 2018. "The Shelf Life of Incumbent Workers during Accelerating Technological Change: Evidence from a Training Regulation Reform," IZA Discussion Papers 11312, Institute of Labor Economics (IZA).
    9. Timothy Perri, 2019. "Signaling and optimal sorting," Journal of Economics, Springer, vol. 126(2), pages 135-151, March.
    10. David Wettstein & Ori Zax, 2018. "Promotion Policies of Workers who Observe their Ability," Economics Bulletin, AccessEcon, vol. 38(4), pages 2509-2514.
    11. Deutscher, Christian & Gürtler, Marc & Gürtler, Oliver & DeVaro, Jed, 2020. "Firm choice and career success - theory and evidence," European Economic Review, Elsevier, vol. 127(C).

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