Tuesday, May 05, 2009

Is education purly signaling?

Below I posed the question, is education purely signaling (that is, a way to distinguish high and low ability workers) or is it transformative (workers become more productive because they attended school).

Here's one summary of some of the empirical evidence for the signaling view:

So, what’s the evidence for signaling theory? Four facts, tucked away in this pdf and in an article by Richard Blundell and colleagues in the February 2000 Economic Journal, should make one ponder:

1. Mature students earn less than newer graduates, despite having the same human capital. This might be because mature students convey a signal that they weren’t smart enough to go to university straight from school, or are not committed to the world of work, or are just bolshy (you don't often meet a Conservative mature student, do you?) . Whatever the reason, this seems more consistent with signaling theory than human capital theory.

2. Students who take gap years earn much more than students who don’t; the gap is almost as great as the return to a degree itself. Taking a gap year doesn’t necessarily build skills, but it reveals character traits (being middle-class) valued by employers.

3. Returns to vocational education are often low, relative to non-vocational courses. Oxford classics graduates earn good money, even though the ability to converse with a dead Roman is not required for many jobs.

4. University drop-outs earn less than people with just A levels. Human capital theory says this shouldn’t happen – because they have a little more education. Signaling theory says it should. Drop-outs signal a lack of determination, which is a bad sign for employers.

Of course, this evidence is not conclusive; there is evidence for human capital theory too.
Self-assessment question -- why does the evidence described support the signaling view of education?

We'll return to the alternative view -- education as skill acquisition next week (but here's one response - expanded further here - to give you something to think about in the meantime).

Also ... scroll down in this link for some additional discussions of the signaling model and its implications for education policy.

I think these studies are interesting support for the signal theory of education. Basically, the results of the studies are that firms use your educational background to evidence what type of person (and therefore worker) you are. College grads who took a year off after high school before enrolling earn more than adult college grads? That only makes sense if signal theory is true. Also, it is funny and interesting that you can have a degree in something totally irrelevant in most labor markets (like the Classics) and yet still make a lot of money. Again, that seems to be clear evidence that signal theory is true.

I must caveat, though, that I do not think education is purely signaling. I would tend to believe that firms hire workers at least partially based on their skill level and ability in certain fields. Otherwise specialty firms in economics, law, medicine, etc., would be suffering poorly.
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