Signalling in Education

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We tend to assume education is a merit good. – A beneficial good that has external benefits for society. However, another approach to education considers how education acts a signal of ability.

Signalling in education suggests productivity is independent of education, but education acts as a credential for greater ability.

In other words, if you are able to get good A levels and get a 2.1 degree from a respected university, then a firm will have evidence that you have certain valuable skills, such as the ability to learn and write. Therefore, you are more likely to get a highly paid job. However, the education might not actually increase your labour productivity, but only show you have the capacity to be an able worker. For example, a degree in ancient Greek may never be used in your job as an accountant. In this case, the only function of higher education is signalling your ability.

If it is true, that higher education only acts as a signal, then it can be seen as economically inefficient, and maybe there is a better way to signal ability than an expensive three years of studying?

A report by Richard Blundell and colleagues in the February 2000 Economic Journal, suggest some reasons higher education may have mainly a signalling function. [1. link to blog post, pdf not available]

  • Students who take a gap year earn more than students without – suggesting skills learnt on a gap year are useful to employers.
  • University drop outs earn less than students with just A – Levels. In theory drop outs should earn more because they have more years of education. However, a drop out may signal poor ability to employers.
  • Returns to vocational training are low compared to non-vocational training, this may reflect a long prejudice against vocational training compared to traditional education.

If education is merely signalling function, this would suggest

  • An expansion of higher education is not justified.
  • We should put more funds into shorter, more practical vocational training than three year degrees.
  • If education was 100% signalling, there would be a justification for taxing education so we could spend less time on merely creating credentials and more time being productive.

These reasons are not conclusive. It is hard to measure the increase in labour productivity that arises from taking a degree in ancient history. But, if you compare the cost of a history / sociology / politics / economics, three year degree to the increase in labour productivity, it is likely to be higher than other forms of education

Limits of Signalling

Signalling is not the only function of higher education. Clearly some degrees play a key role in training a workforce to have higher labour productivity. For professions such as research scientists, teaching, doctors, and medicine, a degree is indispensible, to claim it is only a signal would miss some skills that taking a degree can teach.

Also, higher education may have value other than just measurably increasing labour productivity. Higher education may create a society more knowledgeable and willing to be critical of established opinions.

However, for other degrees and less academic students, the role of signalling may be an important part in the value of education. If higher education acts more as a signal for ability rather than raising labour productivity, it has important consequences such as for the debate about paying for university education and what the optimal rate of higher education is.

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photo: Lynne Pettinger Flickr

By on December 15th, 2010

5 thoughts on “Signalling in Education

  1. There is some research which claims that arts degrees for males do not pay for themselves (i.e. the increased earning derived from the degree does not cover the cost of the degree). I’m afraid I’ve lost the link to this research. In contrast, arts degrees for females allegedly DO pay for themselves.

    This study also showed that vocational and science degrees for both males and females DO pay for themselves.

    This study (unlike some studies) controlled for family background. That is, youths from stable or middle class backgrounds tend to earn more than others regardless of whether they go to university. Plus those sort of kids tend to go to university. Thus the bald fact that those who go to university tend to earn more proves nothing.

    There are numerous studies which fail to control for family background and which are thus waste of taxpayers’ money.

  2. Pingback: [WATCH]: Your World As I See it – Economics » Economics
  3. I’ve always been told degrees only show future employers a person has the ability to stick with something for four years (in America). A good trait to have too.

  4. There must always be exceptions but I employed my nephew who dropped out of University as a accounts junior on the agreement that he would study to become an accountant in his spare time. 8 years later he has just qualified as a chartered accountant and the world is his oyster. He was in full time work all through this time progressively getting better jobs. I think the role of the mentor and employer is massively underestimated.

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