Investment in early education and job market signaling

We consider a signaling model of the job market in which workers, before choosing their level of education, have the opportunity to undertake an unobservable investment in activities aimed at saving on future education costs. Sufficiently high levels of investments allow a low productivity worker to cut the marginal costs of signaling below the high productivity worker’s. In contrast to standard results, we find that the equilibrium outcome will depend on the relative magnitude of workers’ average productivity. If average productivity exceeds a certain threshold the most plausible solution is a refined pooling equilibrium in which all workers attain the same level of over-education and are paid the same wage. Otherwise, the most plausible outcome is the standard least cost separating equilibrium in which only high ability workers are over-educated