Bryan Caplan  

Ability Bias vs. Signaling Again

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In response to my last post on education, Tyler writes:
[Bryan] cites the signaling motives for education and concludes: "Here, the evidence Tyler cites is simply irrelevant."  This is simply not true and indeed these papers are obsessed with distinguishing learning effects from preexisting human capital differences.  That is what these papers are, so to speak.  In that context, "ability bias" in the estimates doesn't seem to be very large, see for instance the Angrist or Card pieces linked to above.  This paper surveys some of the "adjusting for ability bias" literature; it is considered quite "pessimistic" (allows for a good deal of signaling, in Caplan's terminology) and still it finds a positive five percent a year real productivity gain from an extra year of schooling.
As a graduate of Princeton labor econ, I have to insist that Tyler continues to equivocate between two totally different things: Ability bias and signaling.  The vast majority of the literature to which Tyler appeals focuses exclusively on the former. It tries to answer the question: "Does schooling really increase private earnings?  Or is it merely due to self-selection?  Or some mixture of the two?" 

Aility bias has nothing to do with signaling.  The signaling model says, "Of course schooling really increases private earnings.  But why?  Does it actually raise productivity?  Or merely signal pre-existing productivity?" 

To see the distinction more clearly, suppose every year of education appears to increase a worker's income by 10%. 

If ability bias fully explains this earnings premium, then the true private effect of education on income is ZERO.  The private and social returns to education are EQUAL and NEGATIVE.  (Why?  Because you're "investing" time and tuition, and neither the student nor society receives any financial return in exchange).

In contrast, if signaling fully explains this earnings premium, then the true private effect of education on income is 10%, exactly as naive estimates claim.  The catch: While the private return to education is POSITIVE, the social return is NEGATIVE. (Why?  Because the student invests time and tuition and receives a financial return without actually increasing production.  He's basically rent-seeking).

Bottom line: Using the return to education literature against the signaling model is totally misguided.  Tyler might as well stand up at a concert to "prove" that everyone at the concert will see better if everyone stands up.


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COMMENTS (10 to date)
Alex Godofsky writes:

The 100% signaling model doesn't imply negative social returns if signaling improves labor allocation.

rapscallion writes:

I agree with Alex above. Education as signaling is only inefficient relative to the counterfactual where everyone has better information about each other's underlying abilities, but since this isn't the case signaling is the best we can do, hence it's not fair to say that signaling has a "negative social return."

This is another reminder that basic economic theory actually implies that inefficiency can never be observed.

Silas Barta writes:

@Alex_Godofsky & rapscallion: Bryan_Caplan has addressed this in past discussion of signaling models. Yes, signaling can provide information and therefore improve worker/employer match. But, he crucially notes, it does not provide a benefit at the margin -- that is, people are spending effort on signalling well beyond what is necessary to convey the relevant information, because they have to "outsignal" the others in a kind of arms race (standing up at a ball game, as Bryan_Caplan puts it).

Even though signaling provides a social benefit (in terms of the better matching), we could all be better off if we signaled less, because we could still convey the information about the differential in abilities at less cost.

Alex Godofsky writes:

@Silas Barta

What if additional investment in signaling improves the quality of the signal? To borrow CS terminology, imagine if each additional $X investment in signaling for a given person provides 1 additional bit of information?

Your model requires, I believe, some ability to falsify the signal. Granted that that is true to some extent, if the magnitude of that effect is small relative to the value of the extra information revealed, you still don't necessarily get negative social returns.

Floccina writes:

I think that part of the reason that schooling is mostly signaling is that signaling is what schools mostly try to do. Most secondary schooling seems focused on preparing the student for further schooling. Few even ask what knowledge or skills would most enhance the students lives.

Schools could even use attainment of those most useful skills to test for ability. Yet it is seldom suggested because everybody wants to signal ability in the areas that will be tested.

rapscallion writes:

Silas,

You have gone deep, but you must go deeper still. It’s wrong to say that something is inefficient or has a “negative social return” just because there’s a conceivable (but not actually possible) counterfactual where everyone is better off because people don’t act in an economically rational way (e.g. in a signaling model where everyone only does enough to convey their productivity info., a lot of people have to be economically irrational to not get more education in order to look more productive). Saying signaling is inefficient because if people weren’t economically rational we’d all be better off is like saying that the market wage system is inefficient because if productive workers would just work more for free, we’d have more stuff.

Ultimately, economic models are determinist and hence their equilibria can’t be other than they are. Hence inefficiency can never be observed, so if signaling is observed, it must be efficient in the economic sense.

Charlie writes:

It seems that the disconnect is that Tyler thinks that the goal in the signaling approach is signaling ability. As made clear by this statement:

"The Card results are also consistent with theory, namely that models which emphasize signaling imply large unrealized gains from trade; it’s not that hard for an employer to administer an implicit IQ test as Google and Microsoft do all the time."

If that is the case, then his argument does make sense. It seems that you are arguing, possibly, that employees signal something besides ability that might be important. Is that accurate?

Silas Barta writes:

@Alex_Godofsky: Yes, what if all the evidence all around us and everything signalling theorists have marshalled is wrong, and everyone spending an an extra year in lit crit really does provide a stronger over all signal? What, indeed?

@rapscallion: How about this, then: Government cuts all spending on education. If the signalling model is correct, the resulting new equilibrium has people spending fewer real resources but conveying the same signal and sorting into employers the same way.

Indeed, Bryan_Caplan argues exactly this, as you'll find when you become familiar with his position.

Ignacio writes:

I think this chart explains Brian's point quite well:

http://www.cracked.com/article_19241_a-successful-career-path-then-vs.-now-5Bchart5D.html

Mik writes:

Your use of the word social return of education is also totally misguided. The social return of education may involve significant positive externalities that is not easily monetized (or more or less impossible to monetize); such as "soft" effects on society, views on democracy, tolerance, acceptablity of rationality and scientific approaches to policy and law, et cetera.

There is exactly 0 economic papers adressing the issue of all relevant social returns to education in a reliable manner. We know nothing quantitively about the social returns to education, hence it is misguided to pretend otherwise...

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