Optimal Wage Band for Job Matching with Signaling

TL;DR

This paper investigates how optimal wage bands can improve welfare in labor markets with signaling, proving equilibrium uniqueness and demonstrating mechanisms driven by asymmetric information.

Contribution

It introduces a novel framework linking wage band optimization to ability thresholds, with analytical results on welfare improvements and equilibrium properties.

Findings

Wage bands can enhance welfare compared to no intervention.

Uniqueness of signaling equilibrium is established under general conditions.

Mechanisms driven by asymmetric information are identified.

Abstract

We study an optimal wage band problem in a competitive matching labor market where education signals worker ability. We prove uniqueness of the competitive signaling equilibrium under a general class of utility and profit functions and show that the optimal wage band problem is isomorphic to a simpler optimal ability threshold problem. Using a parametric model, we analyze how wage bands improve welfare relative to no intervention. Our results highlight novel mechanisms driven by asymmetric information, contrasting with existing literature. The framework is broadly applicable to settings where agents invest in costly signals under asymmetric information in competitive matching environments.