Job Market Signalling and Imperfect Competition in the Labour Market

I revisit the classical job-market signalling model of asymmetric information between firms and workers. Workers vary in their productivity. Each individual worker is privately informed of his own productivity, but the firms are not informed; this informational asymmetry may result in inefficient allocation of labour. I examine the impact of imperfect competition in the labour market on the possibility of resolving this informational asymmetry in the labour market (and thereby ensuring efficient allocation of labour) by using education as a signal of productivity, and find that this is possible if and only if the labour market is sufficiently competitive. I characterize this threshold level of competition in the labour market and show that it is not influenced by the distribution of productivity in the labour market.