Wages and allocation under imperfect information

Summary This paper fits in with the literature on signaling, and it stresses the role of sequentially improved job-worker allocation. Allocation is initially done on the basis of signals but later, on the basis of true abilities, as revealed from productive performance. The model yields predictions in line with observations: upward sloping average age-earnings profiles, increasing wage dispersion within signal classes (such as schooling), increasing effect of ability on earnings, higher earnings growth for abler individuals. The model thus demonstrates that the gradual sorting-out of individuals into jobs may be very important, and it also indicates how information on individual abilities may gradually emerge.The paper was presented at the Econometric Society World Congres, Aix-en-Provence, France, 1980.The basic ideas were outlined earlier in the second part of my Discussion Paper 508-78, Institute for Research on Poverty, Madison, Wisconsin. I greatly benefitted from seminars given at the Poverty Institute as well as Erasmus University and in particular acknowledge comments and suggestions by John Bishop, Glen Cain, Jo Ritzen, and Burt Weisbrod.