Education, Signalling and Mismatch

LEANDRO AROZAMENA; HERNÁN RUFFO

San Miguel de Tucumán

Congreso; LI Reunión Anual de la Asociación Argentina de Economía Política; 2016

AAEP y Universidad Nacional de Tucumán

We assess the importance education as a signal of workers' skillsand the effects of poor signaling quality on labor market outcomes. We do soby merging a frictional labor market model with a signaling setup where thereis a privately observed idiosyncratic component in the cost of education. Giventhat highly skilled workers cannot correctly signal their abilities, their wageswill be lower and they will not be matched to the "right" vacancies, or may beunemployed. Skilled workers will then have lower incentives to move to highproductivity markets. Furthermore, fewer vacancies will be created in labormarkets where skills matter, and incentives for workers to invest in educationwill be lower. Overall, an economy where education is a noisier signal generateslower educational attainment, higher unemployment and lower productivity. Inaddition, we provide evidence suggesting that education plays a poor signalingrole in Latin American countries. We then calibrate our model using Peruviandata, and through a quantitative exercise we show that this mechanism couldbe relevant to explain the relatively bad performance of labor markets in LatinAmerican countries.