A Signaling Theory of Unemployment

Ching-to Ma and Andrew Weiss

No 3565, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a signaling explanation for unemployment. The basic idea is that employment at an unskilled job may be regarded as a bad signal. Therefore, good workers who are more likely to qualify for employment at a skilled job in the future are better off being unemployed than accepting an unskilled job. We present conditions under which all equilibria satisfying the Cho-Kreps intuitive criterion involve unemployment. However, there always exist budget balancing wage subsidies and taxes that eliminate unemployment. Also, for any unemployment equilibrium, either there always exists a set of Pareto improving wage taxes and subsidies, or we give conditions under which there exists a set of Pareto improving wage taxes and subsidies.

Date: 1990-12
Note: LS
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Published as Ma, Ching-to and Andrew M. Weiss. "A Signaling Theory Of Unemployment," European Economic Review, 1993, v37(1), 135-158.

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Journal Article: A signaling theory of unemployment (1993)
Working Paper: A Signaling Theory of Unemployment (1991)
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