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Spence's Theory of Signaling

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Spence, in his development of the theory of signaling, indicates closely ties the uptake of education. This is mandatory because an achievement of valid credentials is essential when sending a signal to the prospective employer or buyer. This theory looks at education as an individual’s effort regardless of the cost of attaining the credentials that form the basis for the trust between the sender of the interest signal and the recipient.
In developing his theory Spence makes numerous foundational assumptions. He assumes that for employers to go out and start scouting for prospective employees there must be a vacancy existing that needs a specific set of skills and personality. He understands the pool of skills existing at the time can be divided into a symmetrical set of “bad” and “good” employees. This selection depends on the real value that these employees will bring to the organization. The employer may not predict if the person he is signing up will be good or bad hence he pegs the question of pay on some evidence given by the education credentials submitted by the prospective employee. Though Spence identifies that education may not necessarily increase the rate of production, he concurs with the idea that good employees have a less opportunity cost.
Based on this theory it would turn out that “good” employees would take up the initiative of acquiring more education than the “bad” employees. This will necessitate an effective signaling process that has a direct
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