Educational Signaling and Aggregate Productivity

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One of Tyler Cowen’s readers writes,

Traditional productivity forecast research tends to assume the wage premium is entirely human capital.
[but] If sheepskin effects are purely relative status effects, then the impact on total output and income should be zero, right?

In a cross section, workers with more years of schooling will have higher wages. If you take this as an indicator of productivity differences, then in a time series in which years of schooling increase, you will predict higher productivity as these more-schooled workers enter the labor force. However, if education is only a signal of productivity and not a causal factor in productivity, then what?

Suppose that education produces zero useful work skills, and all useful skills are learned on the job. However, the workers with the best ability to learn on the job also are good at completing school. What does it mean when over time the number of workers with more education goes up? If it means that the pool of workers is getting better in terms of ability to learn on the job, then productivity should go up. If it means that more low-ability workers are somehow completing more years of schooling, then productivity should not go up at all.

Continuing with this scenario, my intuition is that the salary premium for highly-educated workers should fall, other things equal. However, in a time series, other things are not equal. For example, the technology may be changing so as to increase the value of high-ability workers. In that case, the wage premium for the high-ability educated workers could rise while that of the low-ability educated workers could fall.

Even though this scenario is extreme (education produces useful work skills in some cases), I think it may be approximately correct. In that case, the average wage premium for highly-educated workers overstates the marginal productivity premium of additional highly-educated workers over time.

In a Caplanian world, workers who do not complete a lot of schooling send an adverse signal. However, completing a lot of schooling is only a necessary condition for convincing employers that you are trainable. It is not sufficient, and firms use additional screening devices to distinguish among workers with equal numbers of years of schooling. The econometrician does not use those screening devices, and the econometrician ends up lumping together workers with different levels of ability in a way that firms do not. The firm, unlike the econometrician, sees through the worthless college degree in ____ studies. The econometrician is fooled into thinking that putting more kids through college will raise average productivity. The firm knows otherwise.

16 thoughts on “Educational Signaling and Aggregate Productivity”

  1. The firm knows otherwise.

    Then why don’t firms hire people out of high school with good grades? There is hardly anything that is stopping firms, especially small ones, from doing this hiring. Also most high end firms give assistance to secondary education as well. If firms really knew, then why are following this behavior especially in a tight labor market? (Our office does have jobs without college degrees as well.) To be honest, big and successful firms seem to worship the college degree even more than econometricians.

      • Or firms are fine with passing the buck to parents and kids.

        Also, most large firms to have educational assistance programs for their employees though.

        • Also, paying for the screening means that the kid retains the benefit of the ‘credential’, increasing future opportunities for mobility.

    • The signalling component of education may have value for the employers, not just the employees. For example, a law firm or consulting firm gets a direct benefit from its associates and partners having fancy degrees because that signals to potential clients that the firm has very high quality personnel, and this allows it to charge higher fees than it could if it just hired people straight out of high school and taught them the ropes through some kind of apprenticeship program.

      The idea is the university acts like a disinterested 3rd party which provides certification that your employees are smart people.

      • In law and consulting, the differentiation is between people with degrees from higher-prestige universities and colleges and lower-prestige universities and colleges. The differentiation is not from high school graduates, who are not in those job markets at all.

  2. It’s pretty shocking the responsibility I was given coming right out of an MS. I think it’s a mutual con game. Pretend an MS is very high quality, that they are well-educated and trained, and that we only hire the best. We pretend this in order to hide the reality that we have no idea how to train someone to do the job so we hire someone who could jump through some hoops and hope for the best.

    • I also find irony in that this company hired me and had me in charge of a safety-sensitive product with essentially zero training based on signals and then they forced me to be routinely piss-tested. What they should do is ask me if I use drugs, and if I say yes, then ask me if I recommend it to their other employees.

  3. This vlog discussion between two electronics engineers (EEs) goes into some of the education issues Arnold raises in this post.

    “For example, the technology may be changing so as to increase the value of high-ability workers.”
    It hardly need be pointed out that EEs are high-ability workers. In the vlog, they discuss the real possibility that in the near future, EEs will need to know much more quantum mechanics to work with quantum computing.

    In regards to signalling and some skills learned in college, Ganssle offers his experience that hiring English majors to be programmers was very successful as they were verbose in their commenting of the code and were attentive to structure.

    Another point is that the best EEs tend to be those who were electronics hobbyists, who then pursued higher ed for the theoretical, and, presumably, the credential. This indicates that it will be less successful to try to produce more high-ability workers from those without an innate interest. Also, it emphasizes that in such majors as electronics engineer should be mind and hand, with a lot more electronics tech instruction or at least near unlimited circuit building access to parts, equipment and such. A few regimented labs isn’t going to produce the productive worker.

    Another anecdote is their experience of never solving calculus equations in real life. Knowing the concepts is good, but being a master solving integrals and diff equations, not that useful. I can relate to this as after being punch drunk from partial differential calculus, my professor in my Physics major said not to worry as there were only a few we’d run into and all you had to do was recognize them and know where to look up the solution, if you didn’t have it memorized.

    https://youtu.be/1apCAzCTZdQ?t=3024

      • And aren’t the people who have to do things approaching real math, or god forbid, quantum mechanics a trivially small number of people at the very peak of R&D?

  4. I had an uncle who recruited and hired newly graduated engineers for his firm.
    He said an engineering degree indicated that the individual had the ability and the self discipline to learn to do the job they were hiring them for.

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