From chapter 4 of my book in progress, The Case Against Education.
Signaling has been one of economists' more successful intellectual
exports.After Spence and Arrow developed
the signaling model of education in the 1970s, the idea soon spread to
sociology, psychology, and education research.While few experts are staunch converts, most grant that the idea is
plausible and the evidence suggestive.Yet
strangely, there is one body of experts that sees little or no merit in the
signaling model: labor economists, particularly those who specialize in
In modern labor economics, human capital theory reigns
supreme.Most specialists see signaling
as an irrelevant distraction.Very few
would endorse anything approaching a 20/80 split in signaling's favor.A high-profile chapter in the Handbook of the Economics of Education
fairly represents labor economists' consensus: "Our review of the available
empirical evidence on Job Market Signaling leads us to conclude that there is
little in the data that supports Job Market Signaling as an explanation for the
observed returns to education."
This is a disquieting intellectual development.Economists have plenty of blind spots, but
they spend years studying economic
theory.So you would expect labor
economists to have a crisp grasp of the signaling model.Who else would better understand what
signaling predicts - or whether those predictions are correct?Yet after forty years of research, the
experts most-qualified to judge the signaling model turn out to be the
least-persuaded.If I denied I was
disturbed by labor economists' disdain, I'd be lying.If they're right, I'm wrong.
Where precisely do I part company from mainstream labor
economics?For the most part, I accept
their empirical evidence - especially when they rely on standard, transparent
statistical methods.My claim is that
mainstream labor economists have an interpretive double standard.When their evidence supports the human
capital model, they take the evidence at face value.When their evidence supports the signaling
model, they wrack their brains to avoid giving signaling an iota of credit.
Consider the sheepskin effect.Almost everyone senses that big payoffs for
graduation support signaling and undermine human capital.As long as the rewards for degree completion
were in doubt, labor economists took the sheepskin-signaling link for granted.Once evidence of large sheepskin effects
became undeniable, however, labor economists moved the goal posts.In theory, the sheepskin effect could stem purely from selection; maybe
students who finish their degrees would have been equally well-paid if they'd
dropped out a day before graduation.Sure, the sheepskin effect survives standard ability corrections
unscatched.But human capital purists
can demur, "You didn't correct for weird not-yet-measured abilities."If labor economists consistently enforced
this unmeetable burden of proof, their field would vanish.
Or take the cross-national evidence.Signaling predicts that education will be
more lucrative for individuals than for countries.This is precisely what researchers typically
find.Yet few labor economists even
grudgingly admit, "Signaling wins this round."Instead, they rush to figure out how they've erred.Maybe better data or fancier statistical
methods would help.No?Then the question's beyond us.Move along, nothing to see here.My point is not that the cross-national
evidence is strong enough to settle the human capital/signaling debate.All I'm saying is that if the evidence
supported human capital purism, labor economists would have spent less time
second-guessing the results and more time dancing on signaling's grave.
Labor economists don't merely misinterpret their own
evidence.They also ignore everyone else's evidence.Psychology, education, and sociology all have
useful insight for the human capital/signaling debate, but labor economists
rarely read their research - or even acknowledge its existence.It's classic Not Invented Here
Case in point: Human capital says that education raises
income by imparting useful skills; signaling says education raises income without
imparting useful skills.To weigh the
two theories, then, you must investigate
what students actually learn and retain.Psychologists and education researchers are clearly the go-to experts on
these matters.Yet labor economists
almost never go to these go-to experts.If they did, they would hear lurid tales of a yawning chasm between learning
and earning - precisely as signaling predicts.
Labor economists' root problem, at risk of being
uncharitable, is that they fall in love with education years before they study
the evidence.When they meet human
capital theory, they're instant converts.It tells them what they want to hear: Two things they love - education
and prosperity - go hand-in-hand.When
budding labor economists discover signaling, they rush to reject to it.Most latch on to one of the flimsy "signaling
doesn't make sense" arguments from chapter 1 - "Employers would just do IQ
tests instead," "You can't fool employers for long," "There's got to be a
cheaper way."By the time they examine
the scholarly research, it's hard for labor economists to give signaling a fair
To be fair, however, personal experience would cloud labor
economists' judgment even if love of education did not.Why?Because the link between what academics learn in school and what academics
do on the job is eerily close.I call it
"intellectual incest."We sit in class,
learn some material, then get jobs teaching the very material we studied.Professors can even "acquire human capital"
by recycling our old professors' lecture notes!The upshot: When academics reflect on our own lives, school almost
automatically seems "relevant."To see
the labor market clearly, professors would have to contemplate the alien career
paths of the vast majority students who never enter academia.
When I argue with mainstream labor economists, they grow
frustrated."Is everything signaling?I have
trouble believing that workers can't find a cheaper way to certify their
quality," they ask.I'm tempted to
sarcastically reply, "Is everything human
capital?I have trouble believing that
studying Latin makes you a better banker."
My constructive answer, however, is: Of course everything
isn't signaling.Students definitely
learn useful job skills.School lasts
over a decade.It would be amazing if
students didn't learn something
useful before they left.My claim, as I keep
repeating, is that education is mostly
signaling.Given all the evidence, a
20/80 human capital/signaling split seems reasonable.I'm happy to debate the exact figure.Until labor economists renounce human capital
purism, though, I cannot take them seriously - and neither should anyone else.
 Lange, Fabian, and Robert Topel.2006."The Social Value of Education and Human Capital."In Hanushek, Eric, and Finis Welch, eds.Handbook
of the Economics of Education.Amsterdam: North-Holland, p.505.
 See list of references on Lange and Topel, p.493.
 Lange and Topel, pp.492-495, is probably the
best-developed example of this denialism.After conceding that, "The existence of diploma effects ranks among the
most persistent empirical findings in labor economics," they claim, "Those
least capable to profit from schooling drop out before the completion of degree
years."Lange and Topel then provide a
careful theoretical model of their story, but zero empirical evidence.