Signaling in the Age of AI: Evidence from Cover Letters

We study the impact of generative AI on labor market signaling using the introduction of an AI-powered cover letter writing tool on a large online labor platform. Our data track both access to the tool and usage at the application level. Difference-in-differences estimates show that access to the tool increased textual alignment between cover letters and job posts and raised callback rates. Time spent editing AI-generated cover letter drafts is positively correlated with hiring success. After the tool's introduction, the correlation between cover letters' textual alignment and callbacks fell by 51%, consistent with what theory predicts if the AI technology reduces the signal content of cover letters. In response, employers shifted toward alternative signals, including workers' prior work histories.