Signaling in the Age of AI: Evidence from Cover Letters

Abstract: We study how generative AI affects labor market signaling using the introduction of an AI-powered cover letter writing tool on Freelancer.com. Our data track both access to the tool and usage at the application level. Difference-in-differences estimates show that access to the AI tool increased textual alignment between cover letters and job posts--which we refer to as cover letter tailoring--and raised callback likelihoods. Workers with weaker pre-AI writing skills saw larger improvements in cover letters, indicating that AI substitutes for workers' own skills. Although only a minority of applications used the tool, the overall correlation between cover letter tailoring and callbacks fell by 51%, implying that cover letters became less informative signals of worker ability in the age of AI. Employers correspondingly shifted toward alternative signals, such as workers' past reviews, which became more predictive of hiring. Finally, within the treated group, greater time spent editing AI drafts was associated with higher hiring success.