Signalling Ratchet
posted 2007.02.24 Saturday
In a previous post I mentioned the concept of signalling in the education market and would to discuss the matter further here. The idea of signalling in economics was formally stated by future Nobel Laureate Michael Spence in his 1972 doctoral dissertation, which he also summarized in a 1973 QJE article. Spence described a situation where employers are unable to distinguish between good and bad workers, and thus use some mechanism (e.g. a degree of some sort) as a signal of worker ability. It is crucial to note that the employer is not seeking the skills obtained in acquiring the signal, but rather skills that the applicant already possessed.
In light of my discussion of education, it should be noted that it is entirely possible for signalling to develop on the unhampered market. A simple example is the custom of men giving flowers to women on Valentine's Day. However, distortionary actions (e.g. subsidies or compulsory attendance) by the state can also lead to the establishment or exacerbation of signalling. The important question for education, concerning whether it is productive or wasteful, is which of the two categories is responsible for the existence of signalling. My goal here is not to "prove" either side of the story, but instead to offer a plausible story for how signalling would develop from state subsidization and general encouragement of education.
The process that I am discussing can be thought of as a "signal ratchet." Start at some point in the past, and let's say that the state has implemented Jefferson's proposal of mandating three years of education for child. State schools are set up, and all students are forced to go through the process of three years of formal schooling. Some children (and/or their parents) choose to pursue further schooling, while others do not. Whenever these children enter the job market, the important point for our analysis is that having the three-year degree conveys absolutely no information to potential employers. Everyone has this degree! But what does convey information is that achievement of obtaining additional schooling. This is true whether or not any useful job market skills were acquired in the additional schooling.
Now, some economist comes along, sort of a proto-Gary Becker, performs regression analysis, and comes to the "shocking" conclusion that those obtaining additional schooling (say, another three or six years) are earning a lifetime wage premium well above the three-year-degree students. Policy makers (usually not dissuaded by the economists) pick up these studies, and say "My gosh! We can raise everyone's income by simply mandating that everyone go to school for six years!" The new policy is put into effect, and soon everyone has six years worth of schooling.
But now we're back where we started: everyone has six years of schooling, thus it provides no signal to employers. The more industrious students now obtain nine or twelve years of schooling due to the diluted signal. Our analysis in no way depends on the curriculum being "dumbed down," though this is certainly a possibility. A few years later the proto-Gary Becker's students perform additional regressions noting the nine- and twelve-year students are now earning a premium, and the process is repeated. So it goes. The process is not necessarily linear, and at any given time there is more than one signal, with varying costs.
While a high school diploma is not yet universally mandatory in the united states, something like ten years of compulsory schooling is about the norm. However, other than opportunity costs, a high school diploma is available basically for free to any united states citizen. The calls we here today are for the availability of universal college education, not necessarily in the form of compulsion, but rather in subsidies. If and when this ever happens, my prediction is that compulsory high school diplomas will not be far behind. The signal of obtaining this level will vanish, and all signals above it will be diluted.
If this story is even partially true, it has devastating implications for the case for state encouragement of education, even taking note of any positive externalities that may exist.
In light of my discussion of education, it should be noted that it is entirely possible for signalling to develop on the unhampered market. A simple example is the custom of men giving flowers to women on Valentine's Day. However, distortionary actions (e.g. subsidies or compulsory attendance) by the state can also lead to the establishment or exacerbation of signalling. The important question for education, concerning whether it is productive or wasteful, is which of the two categories is responsible for the existence of signalling. My goal here is not to "prove" either side of the story, but instead to offer a plausible story for how signalling would develop from state subsidization and general encouragement of education.
The process that I am discussing can be thought of as a "signal ratchet." Start at some point in the past, and let's say that the state has implemented Jefferson's proposal of mandating three years of education for child. State schools are set up, and all students are forced to go through the process of three years of formal schooling. Some children (and/or their parents) choose to pursue further schooling, while others do not. Whenever these children enter the job market, the important point for our analysis is that having the three-year degree conveys absolutely no information to potential employers. Everyone has this degree! But what does convey information is that achievement of obtaining additional schooling. This is true whether or not any useful job market skills were acquired in the additional schooling.
Now, some economist comes along, sort of a proto-Gary Becker, performs regression analysis, and comes to the "shocking" conclusion that those obtaining additional schooling (say, another three or six years) are earning a lifetime wage premium well above the three-year-degree students. Policy makers (usually not dissuaded by the economists) pick up these studies, and say "My gosh! We can raise everyone's income by simply mandating that everyone go to school for six years!" The new policy is put into effect, and soon everyone has six years worth of schooling.
But now we're back where we started: everyone has six years of schooling, thus it provides no signal to employers. The more industrious students now obtain nine or twelve years of schooling due to the diluted signal. Our analysis in no way depends on the curriculum being "dumbed down," though this is certainly a possibility. A few years later the proto-Gary Becker's students perform additional regressions noting the nine- and twelve-year students are now earning a premium, and the process is repeated. So it goes. The process is not necessarily linear, and at any given time there is more than one signal, with varying costs.
While a high school diploma is not yet universally mandatory in the united states, something like ten years of compulsory schooling is about the norm. However, other than opportunity costs, a high school diploma is available basically for free to any united states citizen. The calls we here today are for the availability of universal college education, not necessarily in the form of compulsion, but rather in subsidies. If and when this ever happens, my prediction is that compulsory high school diplomas will not be far behind. The signal of obtaining this level will vanish, and all signals above it will be diluted.
If this story is even partially true, it has devastating implications for the case for state encouragement of education, even taking note of any positive externalities that may exist.
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