Devaluaing a College Education: An Introduction to Signaling

Pew Research posted a graph this week,

showing that the rate of 18-24-year-olds attending college has reached an all time high, at nearly 40%. This is, undoubtedly, a good thing. But what implications could this have for those of us currently in college? Let’s look at signaling theory in workforce, theorized by economist Michael Spence.

In the labor market, firms want to hire “good” workers, but they can never be certain of their productivity until they are hired (and often, it still takes considerable time to measure this). Why does this happen? Presumably, there are two keys that determine an individual’s productivity: an individual’s ability (think of this as how smart you are) and effort (think of this as how hard you work). But when a firm looks at prospective employees, it can observe neither of these attributes. Instead, for the most part, all the firm can see are an individual’s age, experience, and education. Although we can’t do much about age, experience and education can be acquired, so they are considered signals. At an early age especially, with experience playing less of a factor, education becomes a heavily weighted signal.

In the hiring process, firms determine what level of education after high school is a good sign of a productive worker–let’s call this e*. Maybe this is 2 years of college, maybe it’s a Bachelor’s degree, who knows. But firms can now distinguish between good and bad workers, since presumably the good ones are at e*, and hire these (or pay the good more than the bad). In this case, additional schooling does not enhance productivity, it merely signals higher ability. This should make sense; presumably those who have higher ability are those who are most likely to succeed at education.

But what happens if attaining e* is easier? With e* easier to achieve,  more people will pursue it, including unproductive workers. When this happens, e* ceases to be an effective signal, failing to distinguish between the good (highly productive) workers and the bad (less productive) ones. If this happens, then e* shifts up; if having a Bachelor’s degree used to mean having e*, now it may mean having a higher degree (e.g. a Masters) or more professional qualifications.

Now let’s bring this back to the graph at the top of the post. If signaling theory holds, then the increasing rate of college attendees doesn’t bode well for the coveted Bachelor’s degree. As more college graduates enter the job market (particularly one as tight as our current market), a diploma may signal less than before. And, as previously mentioned, this may push education demands upward; an advanced degree may be the standard endpoint for entering the job market, community college may be the minimum needed to get hired, not a GED. Now signaling theory is not without its flaws or detractors, but the general framework paints an interesting picture for the future of higher education.