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

  • Luís Santos-Pinto

I extend Spence's signaling model by assuming that 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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File URL: http://dx.doi.org/10.1086/666646
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File URL: http://dx.doi.org/10.1086/666646
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 30 (2012)
Issue (Month): 4 ()
Pages: 873 - 914

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Handle: RePEc:ucp:jlabec:doi:10.1086/666646
Contact details of provider: Web page: http://www.journals.uchicago.edu/JOLE/

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