By Dr. Gary L. Deel, Ph.D., J.D.
Faculty Director, School of Business
This is the ninth article in a 12-part series, adapted from my dissertation work at the University of Nevada Las Vegas, on the discord between academe and industry over the role of hospitality education and the purpose it serves in career development for hospitality professionals.
In the previous part, we explored the Human Capital Theory and the Credentialist Theory as potential explanations for the value of higher education in the hospitality industry. In this part, we’ll look at a third socioeconomic theory, the Job Market Signaling Theory.
Spence’s Job Market Signaling Theory (JMST) and Employment Recruitment
One of the earliest theories concerning recruitment strategy for employers and employees is the job market signaling theory (JMST), first developed by economist A. Michael Spence in 1973. JMST holds that when employers are recruiting, they are essentially making investment decisions in an environment of uncertainty.
Spence concurred with HCT to the extent that job candidates are generally evaluated based on their perceived potential productivity. And ignoring other factors, the candidate with the highest potential productivity should be chosen over all others.
However, with JMST, Spence focused on the fact that employers can only speculate on the potential productivity of each candidate based on the available information. In other words, employers can make educated guesses about a candidate’s prospective value measured in productivity.
But an employer can never know with absolute certainty the actual level of productivity until the candidate is hired and begins to perform. Therefore, hiring decisions are based exclusively on the information available to employers at the time.
JMST’s Mutable and Immutable Signals in Hiring Decisions
Spence compared hiring decisions to a lottery of sorts, one in which the gamblers, that is the employers, have an amount of evidence with which to make an informed decision. JMST posits that prospective employees provide this evidence in the form of “signals” that are used to convey messages.
Within this realm of signals, Spence distinguishes those that are immutable and unchangeable from those that are mutable and subject to change at the discretion of the signaler. Examples of immutable signals include such traits as race and gender (generally thought of as being unchangeable).
Even age, while ever-changing, is not changeable at the discretion of the subject and is therefore considered immutable. However, education is an example of a mutable signal, something that can be changed if the signaler chooses to do so.
Spence described the costs as signaling costs. In the example of education, these costs would be defined as tuition and other expenses associated with earning a college degree.
Similar to the cost-benefit analysis of HCT described in the previous article, Spence reasoned that signalers will naturally compare the benefits of such signals (quantified by differences in expected compensation) with costs in deciding whether or not such pursuits are worthwhile. For example, if available data suggest that the difference in salary for college degree holders is more than sufficient to offset the cost of that degree, then it should be expected that such investments will be made.
Likewise, employers learn from these repeated interactions as well. As statistical data are aggregated on the correlation between certain signals and productivity, employers can bolster their own confidence in making employment decisions.
In other words, if data suggests that college graduates tend to be more productive on average than those without a college education, then employers can interpret the education “signal” as an indicator of higher potential productivity. Therefore, both employer and employee develop strategies based on this exchange of information to maximize their respective returns.
JMST has been tested in numerous careers, such as software developers, economists, new business entrepreneurs and even equity analysts. The integrity of JMST has also been compared and contrasted with that of HCT. Throughout, JMST has shown promise as yet another alternative explanation for the purpose of higher education.
In the next part of this series, we’ll look at a final socioeconomic theory that attempts to explain the value of higher education in hospitality – the filtering theory.