Abstract
This paper presents a signaling explanation for unemployment. 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 may be 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 balanced-budget wage tax and subsidy schedules that eliminate unemployment and increase the expected incomes of all workers. Moreover, unemployment can be eliminated with tax schedules that do not raise any revenue, and that place very weak informational demands on policy makers; however these tax schedules do not always increase the expected income of every worker.
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