Investment in Education as a Way of Overcoming the Problem of Information Asymmetry in the Labor Market

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Abstract

The need for classifying workers in the labour market exists in the case of information asymmetry between workers and employers. It is expected that certain mechanisms will be developed in order to overcome this information asymmetry. One of those mechanisms is signalling, whose basic idea is that highly productive workers take certain actions in order to separate themselves from the low productive workers. This paper reviews an economic role of education as a signal in the labour market. The goal of the paper is to show theoretically how education can play the role of signal in order to solve the problems caused by the asymmetric information. The importance of such analysis is reflected in the fact that the recommendations for educational policy makers in terms of investment in education are different depending on whether education serves as a mechanism for improving productivity or as a mechanism for signalling different productive capacity. It is shown that these differences arise from distinct ways of measuring social rates of return on investment in education.

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