Signalling and Screening Theory

The contemporary labour market is characterised by imperfect information. This occurrence can produce a degree of uncertainty for the Human Resource function, in particular recruitment and selection. The lack of clarity concerning the productive capabilities of potential employees has led employers to seek alternative avenues when recruiting and selecting workers. Signaling and screening theory are an important element in the recruitment and selection process. The increasing qualifications obtained by the workforce is a phenomenon producing various challenges to recruitment and selection. Challenges such as undermining of the efficacy of signaling as well as complicating the recruitment and selection process. A number of actions can be taken by employers in the face of this phenomenon such as a greater emphasis on psychometric testing and fit and the adoption of a front-loaded investment model. Impacts on job seekers entail statistical discrimination that increases inequalities between those with and without qualifications and greater employer bargaining power.
Signalling theory can be defined as the means of conveying to employers the possession of job related skills in a market of asymmetric information. Signaling is mainly carried out by workers to indicate their marketability to employers (Arrow, 1973). The role of education in the labour market is seen as supplying cognitive skills that increase the market value of individuals. Since the true performance of workers cannot be discerned by employers prior to employment, education is regarded as the closest determinant of productivity. Consequently qualifications assume a more attractive stance in the marketplace as individuals cultivate signals of productivity to potential employers.
Screening theory can be taken to refer to the response of employers to imperfect information regarding individual characteristics in the labour market. Screening mainly undertaken by employers can assume the role of a filtering