How Acid are Lemons? Adverse Selection and Signalling for Skilled Labour Market Entrants

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp12014.pdf Non-technical SummaryA major incentive for human capital investments is the possibility to signal individual productivity gained by training not only to the present employer but also to the external labour market. There are only few empirical assessments of the capacity to signal the value of professional or occupational training, however. The most important reason for this gap in the literature is that training quality and employee productivity are not easy to measure.More specifically, prior tenure, unobservable ability and the business cycle usually have an unobservable effect on the market value of job applicants after training.This paper for the first time presents evidence for negative selection and signals for employer changers. It uses the German dual apprenticeship system as an institution that allows us to analyse the value of signals after occupational training. Apprentices do not have prior employment experience and they are relatively homogeneous with respect to their age and schooling background given their occupation. In addition, they attend a highly standardised programme with three certificates at the end that help them to signal practical, theoretical and social skills. Finally,most apprentices start and finish their training programme at the same point in time and therefore cyclical labour demand and supply effects are the samewhen apprentices select themselves into a training programme and when they hit the labour market.We distinguish signals from three sources: occupation, training employer and individual.There are quality differences between occupations and therefore we only compare apprentices with the same occupation and remove apprentices who work in a different occupation after they finish their apprenticeship from the data set. Employer changers nevertheless signal a different relative productivity when the occupational retention rate differs. A lower average productivity of employer changers can be assumed if employer changers are a negatively selected group because training employers know the quality of their apprentices and succeed in retaining their most able apprentices. This paper indeedshows that the higher the occupational retention rate the more negative the selection and therefore the higher the wage loss of employer changers. The same effect on entry wages for job changers is found for another group signal, the retention rat...

Work-Related Ability as Source of Information Advantages of Training Employers

“…Most employers who hire quitting apprenticeship graduates train themselves (Mohrenweiser, 2015) and they therefore have experience in assessing marks reported in the apprenticeship certificate and other important information such as school marks, the occupation and the selectivity of the training employer (Wagner and Zwick, 2012;Mohrenweiser and Zwick, 2015). 11…”

“…Graduating from well-paying and large training employers therefore may be public information for outside employers about the average productivity of apprentices (Wagner and Zwick, 2012).…”

Poaching and Firm-Sponsored Training: First Clean Evidence

“…This condition requires a relative productivity assessment between staying and switching apprentices. The first condition includes the possibility that employers plan from the start to retain only a certain fraction of apprenticeship graduates because they screen apprentices during the apprenticeship (Acemoglu and Pischke, 1998;Wagner and Zwick, 2012) 14 .…”

“…Leaving a training company can be interpreted as a stigma and training firms have an information advantage regarding the productivity of their apprentices (Katz and Ziderman, 1990;Acemoglu and Pischke, 1998). In this line, Wagner and Zwick (2012) analyse the earnings rank of apprenticeship graduates and their earnings in their first jobs as skilled employees. They show that the higher the share of retained apprentices, the more negatively selected are those who leave the training firm.…”

Gender Differences

“…Changing workplaces after graduation has a negative effect on future labour market outcomes, even without a period of unemployment in between. It seems to be a negative signal to the future employers if an apprentice does not stay with his/her apprenticeship-employer after graduation (Wagner and Zwick 2012). A number of recent studies have tested the two opposing theories in different countries, with mixed results.…”