Does Speed Signal Ability, A Test of Spence's Theory

Thomas Brodaty, Robert Gary-Bobo () and Ana Prieto
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Thomas Brodaty: Crest
Ana Prieto: Crest

No 2009-02, Working Papers from Center for Research in Economics and Statistics

Abstract: We propose a new test for the presence of job-market signaling in the sense of Spence(1973), based on an extension of the Mincerian log-wage equation. We test the assumptionthat employers are fully informed about relevant worker characteristics vs incomplete infor-mation (i.e., signaling). Our test is based on a variable called delay, de¯ned as the residualof a regression of school-leaving age on the worker's highest degree. Making use of variousinstruments, we ¯nd a robust, signi¯cant and negative impact of delay on wages, averaged overthe ¯rst ¯ve years of career. A year of delay causes a 9% decrease of the student's wage, whileat the same time, returns to education are positive with standard values. We show that theassumption of fully informed employers is not compatible with this e®ect. The only reasonableexplanation, supported by the data, is the fact that longer delays signal unobserved but neg-ative characteristics. We ¯nally estimate a nonlinear model of education choices and cannotreject the assumption that the data is generated by a job-market signaling equilibrium.

Pages: 84
Date: 2009
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Citations: View citations in EconPapers (2)

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