Abstract
The purpose of this paper is to analyse the impact of asymmetric information upon labour market decisions. First, in the face of uncertainty concerning person-specific information, self-selection employment contracts develop which induce ‘sorting’ within the labour market. Second, we show the existence of a smaller share in investment in specific human capital for those who accept the self-selection contract relative to those who refuse such contracts. Thus, the earnings of those who accept such contracts are less responsive to changes in specific human capital than the earnings of those who refuse these contracts. Third, we applied the model to the market for professional teachers in British Columbia, Canada. The results of the empirical tests were shown to be consistent with the hypotheses proposed. In addition, once we controlled for the level of and the distribution to human capital the Public–Independent earnings differential fell from 64.3% to 23.9%.
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