Job Market Signaling and Job Search

Andriy Zapechelnyuk and Ro'i Zultan

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium.

Pages: 24 pages
Date: 2008-07
New Economics Papers: this item is included in nep-cta, nep-dge and nep-lab
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Related works:
Working Paper: Job Market Signalling and Job Search (2008)
Working Paper: Job Market Signaling and Job Search (2008)
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