Using Educational Investment as a Screening and Signaling Device in the Labor Market

Abstract

In the classical Spence´s model, workers have private information on their productivity and they use educational investment in order to signal their productive skills to an uninformed employer. Differently, we consider a two-period model in which an informed worker may invest in education in the first period, in which case she will not participate in the labour market and give up the market wage in that period, but her diploma will allow her to signal a greater productivity and receive a greater wage in the second period. As a result of the introduction of the investment period in the model, the educational investment may be used as a screening or a signalling device. We found that the relationship between the labour market conditions and the worker´s incentives to invest in education will depend on whether education plays a dominant role as a screening or a signalling device.