The desire to stand out in the job market is increasingly leading people to develop free and socially useful products such as open source software. Programmers want to ”signal” their talents to the information technology (IT) industry – and in the case of open source software, the resulting LINUX and Apache programs now compete with some products and complement other products of their potential employers.

Writing in the July 2009 Economic Journal, Mikko Leppämäki and Mikko Mustonen analyse the significance of ”skill signalling” in the IT and other digital industries. Their findings challenge the conventional view that full information about a job candidate”s ability is desirable. In fact, limited information can encourage candidates to create free products that benefit many – including their prospective employers. This is particularly true of high- tech industries with low production costs.

The research also runs contrary to the work of Nobel Prize-winner Michael Spence, which criticised ”signalling” as socially wasteful – for example, studying for a degree simply to get an interview. If the freely available product is a strong competitor or a complement, its value may exceed the social cost of the signalling activity – that is, people working without pay. Thus, signalling becomes socially desirable.

The researchers cite the example of the Star Wreck movie (www.starwreck.com). It was created by unpaid volunteers, and over eight million copies have been downloaded for free from the internet. The motivation of the creators was to show their skills. The output is a movie, competing for the eyeballs of viewers with movies created by their potential future employers in the movie industry.

Skill signalling also happens within firms, where the ideas of current employees affect their promotion prospects. The management regards new ideas as credible signals of employees” innate abilities. Employees may only be interested in promotion, but the ideas they come up with may prove very useful to the company.

The authors comment:

”Skill signalling by professional workers is likely to have powerful effects in industries where output has negligible production and distribution costs, as in software. The importance of such digital industries is increasing.”

”Skill Signalling with Product Market Externality” by Mikko Leppämäki and Mikko Mustonen is published in the July 2009 issue of the Economic Journal.

Mikko Leppämäki

Helsinki School of Economics

Mikko Mustonen

Helsinki Centre for Economic Research | +358 400 200480 | mikko.mustonen@hse.fi