Bryan Caplan  

Martorell and Clark's "The Signaling Value of a High School Diploma"

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I'm slowly working my way through the select group of empirical papers on signaling.  One of the neatest so far: Paco Martorell and Damon Clark's 2010 working paper, "The Signaling Value of a High School Diploma." 

Background: There are quite a few papers on the "sheepskin effect" - the discrete earnings bump you get when you finish a degree.  In principle, sheepskin effects could reflect human capital acquisition.  Maybe academic programs are like cars: if you don't have all four tires, you can barely drive - and if you don't have all four years of high school, you are barely more productive than a drop-out.  But in practice, most researchers interpret sheepskin effects as evidence in favor of the signaling model.  The market rewards people who finish their degrees because finishing is a signal of determination and ambition.

Martorell and Clark admit that standard estimates of the sheepskin effect are fairly large: "estimates of the return to a high school diploma in regressions of wages on diploma receipt and other controls suggests that a diploma increases wages by between ten and twenty percent."  That's well in excess of standard estimates of the annual return to education.  But M&C have an amazing data set that allows them to perform stronger tests than ever before.

M&C explain that some states - including Florida and Texas - won't give students a diploma unless they pass an exit examination.  You can finish 12th grade, but if you don't pass the test, you don't get a diploma.*  All students take the test at least once; those who fail can repeatedly try again.  But eventually, it's do or die.  And M&C managed to get the following information for literally hundreds of thousands of students from Florida and Texas:

a. The usual variables - years of education, demographics, etc.
b. Exact test stores - with pass thresholds
c. Income years later

To eliminate selection issues, M&C narrow down their sample to the "do or die" students.  When they do so, the sheepskin effect basically disappears.  Earnings are a smooth function of exit exam scores, with no jump at the passing score.  If I'm reading the paper correctly, their abstract is actually overly modest.  M&C don't just "rule out signaling values larger than five or six percent"; their point estimates are roughly zero.

Overall, it's an extremely impressive and thought-provoking paper.  But what does it mean?  My two main thoughts:

1. As M&C explain, employers rarely verify high school diplomas; they basically just take applicants' word for it.  My question: Suppose you ask applicants who finished 12th grade but failed their entrance exam: "Did you finish high school?"  How would they respond?

I strongly suspect the vast majority would say, "Yes" - and not consider it a lie.  In contrast, while applicants who didn't finish 12th grade face a clear temptation to claim otherwise, I suspect that many, perhaps most, admit the unflattering truth.  (Maybe they're afraid of getting caught; maybe they think lying is wrong; maybe they're just not very strategic).

Notice: If my suspicions are correct, employers don't see "high school graduates with diplomas," "high school graduates without diplomas," and "high school drop-outs."  Instead, they see two main groups.  The first contains: {all high school graduates with diplomas, the vast majority of high school graduates without diplomas, and dishonest drop-outs}; the second contains {a small minority of high school graduates without diplomas, and honest drop-outs}.

In this story, there would be virtually no sheepskin effect for "passing your exit exam," precisely as M&C report.  But there could still be a large sheepskin effect for "finishing 12th grade."  And M&C's exit exam data, awe-inspiring though it is, would be almost powerless to detect the latter sheepskin effect.

2. As far as I can tell, M&C have the best data set ever constructed for detecting ability bias.  After all, they've got measures of years of education, earnings, and initial test scores - i.e. test scores before high school has had much time to work its cognitive magic (if any). 

The upshot: I'd really like to see M&C write another paper where they simply estimate the return to education with and without the initial test score as a control.  Indeed, I'd consider this a more credible lower bound on ability bias than the whole IV literature has managed to produce.  And I strongly suspect that M&C will find that this lower bound is at least 30% of the naive return to education.

* With some exceptions, of course.


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COMMENTS (2 to date)
ohwilleke writes:

The empirical literature I am aware of that attacks the converse of what this study looks at is the data comparing people who receive GEDs and high school diplomas.

The GED receipients (many of whom are inmates in prison education programs) demonstrably have the same or better academic achievement as high school diploma recipients, but have far worse life outcomes. (More generally, prisoners have a much bigger formal educational credential deficit relative to the general population than they do an IQ deficit relative to the general population, although prisoners are below average on both measures. Even a mere associate's degree reduces the likelihood of being incarcerated by more than an order of magnitude relative to high school dropouts with or without a GED.)

In both cases, the presence or absence of a specified level of academic achievement is irrelevant. It is the showing up and making some sort of effort to be compliant that matters far more in the sheepskin effect.

The place to look for a cross check in the comparative literature would be someplace like New Zealand, where the percentage of people who graduate from secondary school is on the same order of magnitude as the percentage who have some college in the United States, and where it is ordinary and customary to discontinue formal education the very day that one reaches school leaving age and to go on to relatively middle class jobs like bookkeeping, construction estimating, secretarial work, auto mechanic jobs, lower management (e.g. foremen), etc., so that graduating from high school doesn't send as strong a signal.

Steve Sailer writes:

Yes, it's an excellent study. I had some conversations with one of the authors about a year ago and was quite impressed.

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