Job Market Signaling
TL;DR
Education signals ability to employers even when it teaches nothing—the credential's cost makes it credible, not its content.
Speed Read
0%
300 WPM
-- remaining
Nobel Prize-winning paper (2001, shared with Akerlof and Stiglitz) that created the economic theory of signaling. Demonstrated that credible signals require differential costs—the core insight connecting peacock tails to college degrees. Central to the book's treatment of how biological signaling principles explain market behavior.
Key Findings from Spence (1973)
- Education functions as a costly signal of ability even if it adds zero productive skills
- Signal credibility requires differential cost—easier for high-ability to acquire than low-ability
- Employers rationally pay premiums for signals that reliably correlate with unobservable quality
- Separating equilibria emerge when high-ability workers choose to signal while low-ability workers do not
- The 'sheepskin effect' shows market pays for credential completion, not marginal learning