Econ Duel: Is Education Signaling or Skill Building?


Drug testing helps minority job applicants @jacindaardern

Statistical discrimination is a harsh mistress. If reliable measures of the quality of job applicants are unavailable for short-listing, such as credit checks, coarser, less reliable screening devices will be employed. That was the case when credit checks were prohibited in employment recruitment:

Looking at 74 million job listings between 2007 and 2013, Clifford and Shoag found that employers started to become pickier, especially in cities where there were a lot of workers with low credit scores. If a credit-check ban went into effect, job postings were more likely to ask for a bachelor’s degree, and to require additional years of experience.

There are other ways that employers could have also become more discerning, Shoag says. They might have started to rely on referrals or recommendations to make sure that applicants were high-quality. In the absence of credit information to establish trustworthiness, they may even have fallen back on racial stereotypes to screen candidates. The researchers couldn’t measure these tactics, but they’re possibilities.

Drug testing allows employers to dispel less accurate stereotypes about drug use among different ethnic and social groups. They increased hiring of minorities because a reliable measure became available of their drug use:

…after a pro-testing law is passed in a state, African-American employment increases in sectors that have high testing rates (mining, manufacturing, transportation, utilities, and government).

These increases are substantial: African-American employment in these industries increases by 7-30%. Because these industries tend to pay wage premia and to have larger firms offering better benefits, African-American wages and benefits coverage also increase. Real wages increase by 1.4-13% relative to whites. The largest shifts in employment and wages occur for low skilled African-American men.

I also find suggestive evidence that employers substitute white women for African-Americans in the absence of testing. Gains in hiring African-Americans in these sectors may have come at the expense of women, particularly in states with large African-American populations.

Employers test for drug use both for health and safety reasons and as a way of screening out less reliable employees. People who break the rules are not reliable employees and that includes taking drugs. In low skill jobs, what employers seek is a recruit who is friendly and reliable.


Testing of the skills of workers also showed similar results. What happened is that the ratio of black to white hirings do not change. The administration of these skills tests allowed the more productive of both white and black job applicants to be identified and hired.

Employers already had an accurate stereotype of the average skills of different ethnic groups. Administration of tests allow them to identify which members of each group were the most productive.

It is a standard result that statistical discrimination improves the chances of below-average applicants subject to the stereotype but harms those of above average quality. For that reason, applicants look for what methods of counter-signalling to show that they are indeed a quality applicant – make themselves stand out from the crowd.

Employers profit from developing screening devices that go beyond stereotypes to identify above-average applicants. They want screening devices that find those who do not otherwise stand out from the crowd because of difficulties in transferring credible information about their quality. This is a special difficulty with low-skilled vacancies because hiring is made based much more than on character than experience.

Indian parents are scaling walls to help their kids cheat because economics

I ask what is the point of passing an exam where there is widespread cheating, and in consequence the exam has little credibility. What is the point of holding an exam when there is widespread cheating?

If you seek to learn skills, cheating would be totally counter-productive. But if the exam simply produces a credential that people accept, students look for ways to get the credential as painlessly as possible.

Cheating works best if the signalling model of education is true. Students should cheat more in those courses that offer the least productivity gains.

Serious cheaters have been found to be more likely to be younger and have a lower grade point average. But as  argues

“I sometimes find evidence of cheating on exams but I rarely take action, I don’t have to.  Almost invariably the cheaters get abysmally low grades even without penalty.

Some people I know get annoyed when students without evident handicap ask for and receive special treatment such as extra time on exams.  I comply without rancor as the extra time never seems to help.  Over the years I have had a number of students ask for incompletes.  None have ever become completes.

I call this the law of below averages.”


Charles Murray and the OECD’s Trends in Income Inequality and its Impact on Economic Growth – IQ, signalling, over-education and plain bad career advice

Charles Murray has been cooking with gas lately – on fire. One of his points is too many go to college. Murray points out that succeeded at college requires an IQ of at least 115 but 84% of the population don’t have this:

Historically, an IQ of 115 or higher was deemed to make someone “prime college material.”

That range comprises about 16 per cent of the population.

Since 28 per cent of all adults have BAs, the IQ required to get a degree these days is obviously a lot lower than 115.

Those on the margins of this IQ are getting poor advice to go to college. Murray argues that other occupational and educational choices would serve them better in light of their abilities and likelihood of succeeding at college. Moreover, Murray is keen on replacing college degrees with certification after shorter periods of study such as in the certified public accountants exam.

Murray believes a lot of students make poor investments by going on to College, in part, because many of them don’t complete their degrees:

…even though college has been dumbed down, it is still too intellectually demanding for a large majority of students, in an age when about 50 per cent of all high school graduates are heading to four-year colleges the next fall.

The result is lots of failure. Of those who entered a four-year college in 1995, only 58 per cent had gotten their BA five academic years later.

Murray does not want to abandon these teenagers:

Recognizing the fact that most young people do not have ability and/or the interest to succeed on the conventional academic track does not mean spending less effort on the education of some children than of others.

…Too few counsellors tell work-bound high-school students how much money crane operators or master stonemasons make (a lot).

Too few tell them about the well-paying technical specialties that are being produced by a changing job market.

Too few assess the non-academic abilities of work-bound students and direct them toward occupations in which they can reasonably expect to succeed.

Worst of all: As these students approach the age at which they can legally drop out of school, they are urged to take more courses in mathematics, literature, history and science so that they can pursue the college fantasy. Is it any wonder that so many of them drop out?

To add to that, he is in the Bryan Caplan School: education is often an elaborate former of signalling for many degrees. Murray says that college is a waste of time because:

Outside a handful of majors — engineering and some of the sciences — a bachelor’s degree tells an employer nothing except that the applicant has a certain amount of intellectual ability and perseverance.

Even a degree in a vocational major like business administration can mean anything from a solid base of knowledge to four years of barely remembered gut courses.

If the OECD is to be believed, that not enough people are going to college from lower middle class families, obviously IQ is not one of the constraints on access to college Charles Murray suggested it to be.


The growing strength of the case that education is a form of signalling is a literature that the now famous OECD paper reviewed, found wanting, but did not have time to discuss in the working paper.

Another contemporary theme the OECD paper reviewed, found wanting, but did not have time to discuss is a large number of graduates who end up holding jobs that do not require a university education – going to college:

About 48 per cent of employed U.S. college graduates are in jobs that the Bureau of Labor Statistics (BLS) suggests requires less than a four-year college education.

Eleven per cent of employed college graduates are in occupations requiring more than a high-school diploma but less than a bachelor’s, and 37 per cent are in occupations requiring no more than a high-school diploma.

The proportion of overeducated workers in occupations appears to have grown substantially; in 1970, fewer than one per cent of taxi drivers and two per cent of fire-fighters had college degrees, while now more than 15 per cent do in both jobs

All in all, the OECD has gone into the dragons den by backing the accumulation of human capital as its mechanism to link inequality with lower growth. No matter how you spin it, this linking of lower economic growth to greater inequality through financial constraints on the accumulation of human capital by the lower middle class was a bold hypothesis.

The case for investing more in education is not a slam dunk. Higher education – university or polytechnic – is a rat race that many don’t need to join.The case for the government paying a great many more to join that rat race is rather weak.

Claudia Goldin’s pollution theory of sex discrimination

Claudia Goldin argues that it is  difficult to rationalise sex segregation and wage discrimination on the basis of men’s taste for women in the same way as discrimination based on race or ethnicity. Goldin developed a pollution theory of discrimination in which new female hires may reduce the prestige of a previously all-male occupation.

When work took more brawn than brain, the distributions of skills and natural talents of men and women were further apart. Women were not as physically strong as men. This counted for more both before the Industrial Revolution and at the height of the Industrial Revolution when most factory work involved a considerable amount of brawn.

As machines substituted for strength, as brain replaced brawn and as educational attainment increased, the distributions of attributes, skills and natural talents narrowed by sex.

Because there is asymmetric information regarding the value of the characteristic of an individual woman, a new female hire may reduce the prestige of a previously all-male occupation.

Prestige is conferred by some portion of society and is based on the level of a productivity-related characteristic (e.g., strength, skill, education, ability) that originally defines the minimum needed to enter a particular occupation. People had to have a minimum amount of the socially prestigious strength or skill before they are hired.

Male fire fighters or police officers, to take two examples, may perceive their occupational status to depend on the sex composition of their police station or firehouse. These occupations are socially prestigious because of the strength and courage of police and fire-fighters. Men in an all-male occupation might be hostile to allowing a woman to enter their occupation even if the woman meets the qualifications for entry.

A reason for this hostility of the existing male members of the occupation is the rest of society may be slow to learn of the qualifications of these female newcomers. Their entry against this background of ignorance in the wider society  may downgrade the occupation as still carrying prestigious characteristics such as physical strength. As Goldin explains:

Because they feel that the entry of women into their occupations would pollute their prestige or status in that occupation. Very simply, some external group is the arbiter of prestige and status.

Let’s take an example of firemen, and let’s say we begin not that long ago when there were no women who were firemen—which is why they’re called firemen.

And to become a fireman you have to take a test, lifting a very heavy hose and running up many flights of stairs. And every night, the firemen get off from work and go to the local bar.

Everyone slaps them on the back and says what great brawny guys they are and what a great occupation they are in, and everybody knows that to be a fireman requires certain brawny traits and lots of courage.

But nobody knows when there’s a technological shock to this occupation. And in this case it might be that fire hoses become really light or the local fire department changes the test. There are information asymmetries. But they do note that for this “brawny” characteristic, the median woman is much lower.

So if we observe a woman entering the occupation and we don’t know how to judge women, we’re going to assume that her skills are those of the median woman. Or it may be that we can observe something having to do with her muscles and that may up it a little bit.

But chances are we’re going to assume that some technological shock has happened to this occupation. And so her entry into the occupation is going to pollute it.

Then when they go to the bar, people will say, “oh you’ve got a woman in the firehouse; now fire fighting has become women’s work.” That’s where the pollution comes in.

Union rules also played a role in preventing the entry of women into some occupations

Many occupations have changed sex over time e.g., librarians, bank tellers, teachers, telephone operators, and sales positions. New occupations  and industries are less like to be segregated on the basis of sex  because they have not developed a social image regarding the prestige of workers.

Occupational segregation came to an end because credentialisation, which spreads information about individual women’s productivities and shatters old stereotypes, can help expunge this pollution of the prestige of specific occupations and jobs both within the industry and in wider society .

The visibility successful women today and in the past may help shatter old stereotypes and increase knowledge about the true distribution of female attributes in this prestigious occupation.

Goldin found that  when typists were primarily men, it was claimed that typing required physical stamina so woman need not apply.

But later, when the occupational sex segregation reversed, when typing became a female occupation, it was said that typing required a woman’s dexterity, which men did not have! When I was at school, only women were taught to type.