Signaling in the Age of AI: Evidence from Cover Letters (arxiv.org)

A recent study investigated the impact of generative AI on labor market signaling through the use of an AI-powered cover letter writing tool on a large online labor platform. The research revealed that access to this AI tool significantly improved the alignment between cover letters and job postings, subsequently increasing callback rates for applicants. Notably, as applicants spent more time refining AI-generated drafts, their chances of hiring success rose. However, the correlation between the quality of cover letters and interview callbacks decreased by 51% after the tool's introduction, indicating that the AI's capability may have diluted the signal content traditionally derived from cover letters. This finding has important implications for the AI and ML community, as it underscores a shift in how employers interpret applicant signals in a landscape increasingly influenced by AI. With the effectiveness of cover letters diminishing, employers are now turning to alternative indicators, such as candidates' work histories, to assess suitability. The study highlights a pivotal transition in hiring practices, emphasizing the need for further exploration into how AI technologies reshape recruitment dynamics and the authenticity of candidate signals in the labor market.