Bryan Caplan  

Ozimek on the Sheepskin Effect

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I think the sheepskin effect is strong evidence in favor of the signaling model of education.  Modeled Behavior's Adam Ozimek's not so sure:
[W]hat does it tell you about someone when they have invested a lot of money into college, come very close to collecting the payoff, but then failed to do so 75% through their senior year? Is the only difference between this person and someone who finishes college really just the small amount of extra education and the sheepskin effect? It seems extremely likely to me that someone who fails to collect their sheepskin effect is going to be systematically very different from someone who has, and most of the plausible differences I can imagine will tend to decrease future wages for the dropout.
In other words:
[P]eople who drop out at 96% have more wrong with them than just having 4% less education than graduates. If u could cause random drop outs at 96% completion you would observe a much smaller sheepskin effect.
My reply:

1. If Adam is right, he's still making a massive concession to education skeptics.  According to the David Card consensus, standard OLS estimates of the return to education are, if anything, underestimates; ability bias is basically a myth.  Adam's story directly contradicts this consensus.  He's saying, contrary to most people in this literature, that pushing people with 15 years of school to wrap up their B.A. would have an unusually small payoff for them.

In short, Adam and I both interpret the sheepskin effect as evidence against the orthodox human capital view.  We're just disagreeing about why the orthodox human capital view is wrong.

2. OK, so why is the orthodox human capital view wrong: ability bias, signaling, or a mix of the two?  Both stories predict that people who fail to finish degrees will, on average, be a lot less productive than people who finish.  The key controversy: In a pure ability story, employers can cheaply and accurately detect a "diamond in the rough" - a student who failed to finish his degree, but nevertheless had all the Right Stuff to do so.  In the pure signaling story, employers must utterly lack this diamond-detection ability; the only way to convince them you have the Right Stuff is to actually finish your degree.

Adam grants that signaling plays some role in the skeepskin effect.  I'll grant that ability bias plays a role.  But all things considered, signaling seems a lot more important.  Detecting diamonds in the rough isn't impossible.  But it's very difficult - especially when employers use credentials to decide whether to interview people in the first place. 

But maybe I'm wrong.  So tell us, dear readers: Where would you be today if external forces prevented you from finishing your degree? 

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COMMENTS (10 to date)
JCE writes:

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Richard Manns writes:

I can't speak for other universities, but I know that Cambridge will issue a DDH (deemed to have deserved honours) degree when someone cannot take their final exams due to severe illness but they do not in the case of professional (e.g. medic/vet finals) exams.

These require evidence that, prior to your illness, you were on-track for a good honours class.

Given the discussion above, this seems a heavy, if implicit, endorsement of the signalling theory.

Tom West writes:

My experience tells me that in a job of any real sophistication, not only can you not tell diamonds in the rough, but it's extraordinarily difficult to tell diamonds even when they're in a setting.

Most jobs and their real impact on business are so multi-dimensional, that at best we only get a rough feeling for how valuable that person is to the company, and in fact, you can end up with a dozen different assessments, depending on which aspect is judged, who is judging, and how the different aspects are weighted.

This would point to the pure signalling model, except that many recruiters like to believe they can do personally do better than the rough metric of a degree.

[And yes, we can tell the top and bottom few percent - it's the vast majority in the middle who are hard to judge.]

Joe Cushing writes:

I don't think its hard to detect diamonds in the rough. All you have to do is hire many people and promote the best. Companies have been doing that since the dawn of the industrial revolution. Education signaling is a somewhat new thing-- at least in its frequency of use. I believe it is cause by an arms race which is aided by gov lowering barriers to education.

Henry writes:

A possible (albeit difficult) test: examine the labour market success of those who had a highly credible and verifiable reason for dropping out. I'm not too sure what that might be (natural disaster?) but it could help worm out the size of the sheepskin effect.

Telnar writes:

I went for several years without a sheepskin that I could have had on demand in order to be able to take graduate courses from time to time at undergraduate tuition rates. None of my employers seemed to care, but perhaps I just had a good explanation for ignoring the sheepskin.

Stan writes:

I dropped out of college 3 courses short of my degree. I stopped caring; I still don't care. I have no prospects (I might be able to find a job at McDonald's).

Yes it bothers me--just not enough yet. I understand why nobody will hire me. I wouldn't.

Mike writes:

I finished a degree at a no name school. I became an officer in the Marine Corps. I had a corporal working for me that had over three years at Brown.

Telnar and others like him that don't finish their degrees likely encountered a better alternative. These people stand out for various reasons.

My own business experience has left me with a bias in favor of those that never went to college over those that went and never finished. This bias does not hold for the Telnars, as they will produce ample evidence of the superior alternative they chose.

If I hadn't finished my degree, I would not have obtained the commission. That commission was an important first step in a moderately successful career.

I propose that the process of hiring entails a sequence of decisions made at two levels of management, in perhaps most large organizations. First, mid-management creates a position with a salary range. Second, lower, line-level management interviews candidates and selects one which will almost certainly be hired. Third, the higher, mid-management gives a final stamp of approval.

Signaling between these levels of management comes into view. The line manager may sense he sees a diamond in the rough, a candidate he would risk hiring if it were his decision alone, but this line manager may be unwilling or unable to pay the transaction cost of communicating his hunch to his boss. Symbols become important.

Further, the costs and benefits of hiring a diamond in the rough are not felt at the same level of management. The line manager faces risk in recommending what he suspects is a diamond in the rough. But the additional profits which may come from the line manager's hunch do not feed directly into the line manager's pocket.

Mark V Anderson writes:

I have been an accountant for the last 30 years. If I had left school any time before getting my degree I wouldn't have gotten any of the jobs I've worked at in my career. This is so even though my knowledge and skills at the point of drop-out would be essentially identical to what they were at the point of graduation.

I also believe the skills I received in my four years of college that were applicable to my career could easily have been condensed to one year. But then I wouldn't have received a four year degree and I would have been perceived as a tech school graduate instead of a college graduate. My degree was at least 75% signaling.

Richard is correct. At medium and large companies, the decision to hire (and especially the setting of required qualifications) is never the act of just one person. So hiring the diamond in the rough is basically impossible. And 90% of well paid professional positions are at medium and large firms.

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