Asymmetric Information in Labour Markets

Asymmetric information is a situation wherein one party in a transaction has a different information set from the other. In labour markets, the job seeker knows their true abilities and work ethic while the prospective employer does not. Firms must spend resources during the hiring process to overcome this problem. Anything that a job seeker can do to reduce these transaction costs improves their chances of obtaining employment.
When unemployment rates are low, an education credential can serve as a signal. For example, a university degree in almost any subject, indicates that the graduate has the ability to learn and has the commitment required to complete a four year program. These traits are valuable to an employer. While the same traits may be found in someone without a degree, that information is expensive for an employer to discover.

When unemployment rates are high, different signals are required. Being unemployed for a very long time sends a bad signal regardless of the job seekers abilities. A prospective employer must ask themselves why no one has hired this person. The answer to that question is expensive to determine. An article in Huffington Post citing a FRB Cleveland study shows the difference between unemployment rates by education, and length of unemployment by education. It also points out that “must be currently employed” is a common requirement in job ads.

The message is clear. Employed persons have a better chance of getting a job than unemployed persons. How then does someone with a BA in Economics find a job? Since it is almost impossible to convince a prospective employer that you have the traits they are looking for, get someone else to prove it to them. Get a job. Sounds counterintuitive, how does one get a job if no one will interview them? A job seeker should accept a job well below their qualifications. For example, they could apply at Starbucks. Any job sends a signal that is different from unemployment.