NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Signaling Theory of Unemployment

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Ching-to Albert Ma, Andrew M. Weiss

NBER Working Paper No. 3565
Issued in December 1990
NBER Program(s):   LS

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.

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

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