Equilibria and efficiency in bilingual labour markets

We consider a labour market where two languages are commonly in use and each individual may make a costly investment to learn the language which is not his or her mother tongue. Language skills are productive in a human capital sense and can also be used to signal unobservable traits to employers. Due to the informational asymmetry between workers and employees, the equilibrium rate of bilingualism in the economy may exceed the socially efficient level. On the other hand, the spillovers associated with second language acquisition may imply there is not enough bilingualism relative to the social optimum. We consider the circumstances under which either the signalling or the network welfare effects dominate in equilibrium. Depending on the parameter values of the model, policies of either encouraging or discouraging the investment in language skills may be welfare enhancing.