Signalling Theory, Education Policy and Labour Market Efficiency: A Review of Prof Garry Becker

Abstract

This paper reviews the concept of signalling theory in the economics of education, focusing on Gary Becker's (1964) contributions. In the labour market, employers' uncertainty about potential employees' competence and honesty inspires signalling. According to signalling theory, education serves as a signal to employers about an individual's productivity and potential. This review examines Becker's contributions to signalling theory and its application to labour market outcomes, exploring implications for education policy and labor market efficiency. While this paper is a theoretical review, signalling theory has empirical applications in economics of education, informing policymakers and educators about the strategic and efficacy cost of signalling. Understanding signalling theory's implications can help create a more efficient education system and labour market. Consequently, this paper presents two frameworks: the Signalling Theory-Productivity Framework that explains the processes of signaling towards organizational productivity; and the Signalling Theory and Labour Market Efficiency Framework which provides a testable structural model. Finally, we argue that the quality of employer’s signalling attraction depends on the individuals' honesty in education, training acquired and the cost of signaling.