Rational inattention and employer learning

Recent research results cast doubt on the validity of the employer learning model by empirically establishing the absence of learning over time among college graduates and by documenting persistent, negative effects of graduating during a recession. This paper extends the employer learning model with the theory of rational inattention in which firms optimally allocate limited attention (i.e., information processing capacity) to learning about the productivities of different workers. I find that firms allocate more attention to workers who have a higher impact on profits (i.e., college graduates) and learn as much as possible in the current period. Taken together these results imply the absence of learning over time for college graduates and indicate that a college graduate that gets (mis)matched to a job with a lower impact on profits will find herself at a persistent disadvantage. The paper therefore resolves the discrepancy between the data and the employer learning model.