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A Signaling Theory of Unemployment

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  • Ching-to Albert Ma
  • Andrew M. Weiss

Abstract

This paper presents a signaling explanation for unemployment. The basic idea is that employment at an unskilled job may be regarded as a bad signal. Therefore, good workers who are more likely to qualify for employment at a skilled job in the future are better off being unemployed than accepting an unskilled job. We present conditions under which all equilibria satisfying the Cho-Kreps intuitive criterion involve unemployment. However, there always exist budget balancing wage subsidies and taxes that eliminate unemployment. Also, for any unemployment equilibrium, either there always exists a set of Pareto improving wage taxes and subsidies, or we give conditions under which there exists a set of Pareto improving wage taxes and subsidies.

Suggested Citation

  • Ching-to Albert Ma & Andrew M. Weiss, 1990. "A Signaling Theory of Unemployment," NBER Working Papers 3565, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3565
    Note: LS
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