Labor Market Signaling with Overconfident Workers N.B.: This paper is replaced by Nr 11.07 "Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap" (December 2011)

Luis Santos-Pinto ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: I extend Spence's (1974) labor market signaling model by assuming some workers are overconfident and some underconfident. Overconfident (underconfident) workers underestimate (overestimate) their marginal cost of acquiring education. Firms cannot observe workers' productive abilities and cannot observe workers' beliefs. However, firms know the fraction of overconfident, underconfident, and high-ability workers in the economy. I find that the presence of overconfident and/or underconfident workers in the labor market compresses wages. I show that workers' biased beliefs reduce welfare when workers are sufficiently different in terms of productivity and cost of education. Finally, I show that if the fraction of overconfident workers is relatively low and workers are sufficiently similar in terms of productivity and cost of education, then biased beliefs improve welfare.

Keywords: signaling; labor market; behavioral biases; wages; education (search for similar items in EconPapers)
JEL-codes: D03 D82 J24 J31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-06
New Economics Papers: this item is included in nep-cta, nep-lab and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:10.07

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