The Signalling Role of Promotion in Japan

Under asymmetric information conditions regarding worker productivity between current and prospective employers, a worker's promotion signals his/her productivity. In this Paper, we tested the signalling role of promotion, using Japanese micro-level data. We found that among lower-level positions, promotion seems to signal a worker's ability, and both the business cycle and foreign-capital ratio of his/her company significantly strengthen this effects. These results suggest that external labour market conditions (i.e. asymmetric information regarding a worker's abilities between a current and prospective employer) affect the economic differences among workers in the internal labour market.