Wages and allocation under imperfect information

This paper fits in with the literature on signaling, and it stresses the role of sequentially improved job-worker allocation. Allocation is initially done on the basis of signals but later, on the basis of true abilities, as revealed from productive performance. The model yields predictions in line with observations: upward sloping average age-earnings profiles, increasing wage dispersion within signal classes (such as schooling), increasing effect of ability on earnings, higher earnings growth for abler individuals. The model thus demonstrates that the gradual sorting-out of individuals into jobs may be very important, and it also indicates how information on individual abilities may gradually emerge.