Signalling interventions bridge the information gap between firms and workers, helping jobseekers target their search, improve their applications and boost earnings while offering large potential aggregate gains.
This podcast is the fourth of a series in collaboration with J-PAL, covering their policy insights which highlight evidence on important topics in development. Read “Improving job seekers’ employment and earnings through credible skills signals,” on J-PAL's website.
How can jobseekers more effectively signal their skills and what advantages does this bring to both workers and employers? In this episode of VoxDevTalks, Tim Phillips speaks to Marianne Bertrand and Stefano Caria about what the latest evidence reveals about the effectiveness of interventions designed to enhance how jobseekers communicate their abilities.
High youth unemployment in low and middle-income countries
Globally, approximately 200 million people are unemployed, with youth unemployment rates standing out as particularly high. In low-income countries, unemployment figures may be an underestimate as many individuals become discouraged, stop actively searching for work and are therefore no longer counted in official statistics.
The challenges jobseekers face in demonstrating their qualifications
In low-income countries, significant market failures within the labour market create large inefficiencies. Due to a lack of reliable or high-quality information about jobseekers' skills, firms often resort to hiring workers to assess their skills. If the worker underperforms, hiring the worker was costly. Conversely, if the worker excels, firms risk losing them once their skills become publicly recognised. This dynamic also discourages firms from investing in skill development, as they fear trained workers will leave for other opportunities.
The lack of information often forces employers to rely on referrals from family and friends, which presents its own set of challenges. Social networks can exclude groups like women and young workers, as referrals tend to favour those already employed, often older or male workers. Additionally, social pressures within networks may lead to referrals of individuals who are not suited to the job.
This heavy reliance on social connections can discourage young people from investing in their education and skills, as they may perceive their lack of social capital as an insurmountable barrier, further exacerbating the problem.
There are many different labour market policies
Various active labour market policies aim to address specific challenges faced by both firms and jobseekers. These policies include wage subsidies, adjusted minimum wages for inexperienced workers and short-term or fixed-term contracts. One cost-effective intervention to tackle information asymmetry is enabling workers and employers to signal their skills and requirements more credibly.
What makes a skill signal credible?
A credible skill signal is standardised and issued by a trusted institution. These institutions could include reputable local education providers or human capital organisations that employers naturally rely on. Many interventions leverage existing institutions, such as Ethiopia’s Addis Ababa School of Commerce or South Africa’s Harambee programme, to provide these signals.
Signalling interventions typically follow a similar experimental approach. This involves identifying individuals excluded from the job market due to a lack of recognised signals, measuring outcomes for all participants and providing a skill signal to some individuals to assess its impact.
What do the effects of the intervention look like?
A growing body of evidence suggests that signalling interventions have a positive impact on labour market outcomes. These interventions can help jobseekers better target their job search and improve key milestones in the hiring process, such as increasing the likelihood of progressing from application to interview or securing a job offer. Additionally, there are indications of improved earnings for participants. By addressing the information gap between workers and firms, signalling interventions play a significant role in improving employment opportunities and outcomes.
Firm-level benefits and effects on worker beliefs
While many signalling interventions do not directly measure firm-level outcomes, there are theoretical benefits for employers. These interventions can make it easier for firms to identify the right candidates, leading to better job matches. Improved matches can reduce turnover rates, lower recruitment and training costs, and enhance worker productivity. However, more research is needed to quantify the extent of these benefits for firms.
There is a concern that workers who discover they are at the lower end of the skill distribution may become discouraged from seeking employment. However, the concept of skills is not always a binary distinction between being skilled and unskilled. Signalling interventions can help workers better understand and credibly showcase their unique abilities. This can highlight the value of horizontal differentiation, where individuals excel in different area, over vertical differentiation, which assumes some workers are universally more skilled than others. By fostering a more nuanced understanding of skills, these interventions can encourage workers to pursue opportunities that align with their strengths.
‘It’s much rather the case, where getting a bit more information [about] where you are in this different distribution [lets] you discover your comparative advantage rather than a case that I’m great at everything or I’m bad at everything I should just give it up.’
What is the aggregate impact on hiring?
A key question is whether these interventions expand overall hiring or simply shift opportunities among jobseekers. Evidence suggests a positive impact, particularly on job duration, which indicates better matches between firms and workers. Longer job durations signal that employers are more satisfied with their hires, leading to benefits for both firms and jobseekers.
‘The moment the benefits start flowing to both sides of the market, then we are really talking of an improvement in the allocation of talent that makes the pie bigger for everyone rather than just reshuffling jobs.’
Additionally, productivity gains from these interventions can ripple through the economy. Firms that benefit from improved matches may pass these gains to others through enhanced efficiency and collaboration. To fully capitalise on these effects, comprehensive packages addressing information asymmetry on both sides of the labour market may be necessary.
These interventions appear to offer notable advantages for women. Evidence indicates that providing tools like reference letters significantly increases women’s likelihood of using them. Furthermore, prospective employees are more likely to consider women once they have these reference letters, helping to address gender disparities in hiring and improving access to opportunities for women.
Signalling interventions are highly cost-effective
While their impact on reducing unemployment is approximately half that of training programmes, the cost of signalling interventions is only about one-tenth. This makes them an incredibly high-return investment, delivering significant benefits for both jobseekers and firms at a fraction of the cost of other labour market interventions
‘the direct effects are there, they’re much bigger than costs. There are also potentially indirect effects, general equilibrium effects, that are not being captured by those studies…once you have schemes in place that allow you to signal your skills more credibly that may change people’s investment in those skills.'
Important equity considerations
A critical question is how signalling interventions impact individuals at the lower end of the skill distribution. There likely will be an efficiency-equity trade, with some individuals classified as skilled and others as unskilled. Importantly, the skills highlighted through these programmes, such as soft skills, are not necessarily tied to wealth or income levels. For example, someone might acquire valuable customer interaction skills by working in a family store, demonstrating that such abilities can be developed in various contexts.
Considerations for scaling up
As these interventions are expanded, it is crucial to address the potential exclusion of individuals who lack access to certification. Scaling up should include measures to protect and support those without formal recognition, ensuring that no group is disproportionately disadvantaged. This may involve creating complementary programmes or alternative pathways to skill recognition.
‘the upside is that the gains are probably extremely large, misallocation of resources is likely to be very large in lots of low-income countries…suggest[ing] that low income countries and middle-income countries to a lesser extent are not making the most of one of the most important assets, youth.’