Job market signaling
Spence argued that when employers cannot observe productivity before hiring, an observable and alterable trait such as education can carry information, because workers invest in it to signal and employers set wages accordingly. In a worked example education adds no productivity yet still sorts workers, because it costs low-productivity workers twice what it costs high-productivity ones. He called a negative correlation between signalling cost and productive capability a critical assumption and noted that it is necessary but not sufficient, since there must be enough signal levels within the relevant cost range.
Spence argued that when employers cannot observe productivity before hiring, an observable and alterable trait such as education can carry information, because workers invest in it to signal and employers set wages accordingly. In a worked example education adds no productivity yet still sorts workers, because it costs low-productivity workers twice what it costs high-productivity ones. He called a negative correlation between signalling cost and productive capability a critical assumption and noted that it is necessary but not sufficient, since there must be enough signal levels within the relevant cost range.
Written from the full text of the journal paper (open copy), 2026-11-01.
What our sources record
Recorded when this source was checked, figures included, with page references and quotation marks removed.
Spence, M. (1973). “Job market signaling.” The Quarterly Journal of Economics, 87(3), 355-374. doi:10.2307/1882010 https://doi.org/10.2307/1882010