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

Open access


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.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Akerlof G. (1970). The Market for “Lemons”: Quality Uncertainity and the Market Mechanism. The Quarterly Journal of Economics 84(3) 488-500.

  • Arcidiacono P. Bayer P. and Hizmo A. (2010). Beyond Signaling and Human Capital: Education and the Revelation of Ability. American Economic Journal: Applied Economics 2(4) 76-104.

  • Arrow K. (1973). Higher Education as Filter. Journal of Public Economics 2(3) 193-216.

  • Becker G. (1975). Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (2nd ed). New York: National Bureau of Economic Research.

  • Bezil C. (2007). The Return to Schooling in Structural Dynamic Models: A Survey. European Economic Review 51(5) 1059-1105.

  • Blaug M. (1993). Education and the Employment Contract. Education Economics 1(1) 21-33.

  • Blaug M. (2017). Metodologija ekonomije. Centar za izdavačku delatnost Ekonomskog fakulteta u Beogradu.

  • Borjas G. (2015). Labor Economics (7th ed). McGraw-Hill Education.

  • Brown S. and Session G. (2004). Signalling and Screening. In: Johnes G. and Johnes. J. (Eds.). International Handbook on the Economics of Education. Edward Elgar Publishing Limited.

  • Chevalier A. et al. (2004). Does Education Raise Productivity or Just Reflect it?. Economic Journal 114 (449) 499-517.

  • Chen S. (2008). Estimating the variance of wages in the presence of selection and unobserved heterogeneity. The Review of Economics and Statistics 90(2) 275–289.

  • Gravelle H. and Rees R. (2004). Microeconomics (3rd ed). Pearson Education Limited.

  • Mankiw G. and Taylor M. (2011). Economics (2nd ed). Cengage Learning EMEA.

  • Mas-Colell A. Whinston M. and Green J. (1995). Microeconomic Theory. Oxford University Press.

  • Mincer J. (1974). Schooling Experience and Earnings. New York: National Bureau of Economic Research.

  • Psacharopoulos G. (1994). Returns to Investment in Education: A Global Update. World Development 22(9) 1325-1343.

  • Riley J. (2001). Silver Signals: Twenty-Five Years of Screeining and Signaling. Journal of Economic Literature 39(2) 432-478.

  • Schultz T. (1961). Investment in Human Capital. The American Economic Review 51(1) 1-17.

  • Spence M. (1973). Job Market Signaling. The Quarterly Journal of Economics 87(3) 355-374.

  • Spence M. (2002). Signaling in Retrospect and the Informational Structure of Markets. American Economic Review 92(3) 434-459.

  • Stigler G. (1962). Information in the Labor Market. Journal of Political Economy 70(5) 94-105.

  • Stiglitz J. (1975). The Theory of “Screening” Education and the Distribution of Income. American Economic Review 65(3) 283-300.

  • Weiss A. (1995). Human Capital vs. Signalling Explanations of Wages. The Journal of Economic Perspectives 9(4) 133-154.

Journal information
Cited By
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 215 104 2
PDF Downloads 114 79 0