The dual avenues of labor market signaling

Abstract

This paper explores interactions between the two main avenues through which worker ability is signaled in the labor market — education signaling and promotion signaling. The framework assumes that workers are endowed with values for both academic ability and productive ability, where these abilities are positively correlated but are not identical. Workers use education to signal academic ability but firms care about productive ability which is signaled through promotion decisions. The main analysis yields three returns to education signaling: i) a higher starting wage; ii) higher wages for non-promoted workers late in careers; and iii) a higher probability of promotion. The paper shows that when education and promotion signaling co-exist education signaling fares better from a social welfare standpoint than in models characterized by education signaling only. Also, in contrast to standard models of education signaling, in this analysis there are important education signaling returns late in workers' careers.