Signaling Equilibrium, Intergenerational Social Mobility and Long Run Growth

Abstract

This paper provides a signalling model of intergenerational social mobility and economic growth, in which innate ability of workers, and the type of their education and jobs determine the rate of technological progress and social mobility. It is shown that in economies with one-time non-renegotiable wage contracts, there are generally multiple signaling equilibria, producing lower than the maximum attainable rate of social mobility and economic growth. The paper shows that various labor market practices such as quits, layoffs and promotions, can improve some of the inefficiencies, and improve the rate of economic growth and social mobility. The remaining inefficiencies in the economy can be removed by intervening in the educational system. The paper examines the role of school vouchers for the children of poor family backgrounds in improving the rate of economic growth and social mobility.