Educated Guesswork: A failure of signaling?

September 08, 2004

A failure of signaling?

Gregg Easterbrook and Matthew Yglesias have been discussing the importance of elite universities. Here's Easterbrook's summary of the data (see here for the original paper):

The researchers Alan Krueger and Stacy Berg Dale began investigating this question, and in 1999 produced a study that dropped a bomb on the notion of elite-college attendance as essential to success later in life. Krueger, a Princeton economist, and Dale, affiliated with the Andrew Mellon Foundation, began by comparing students who entered Ivy League and similar schools in 1976 with students who entered less prestigious colleges the same year. They found, for instance, that by 1995 Yale graduates were earning 30 percent more than Tulane graduates, which seemed to support the assumption that attending an elite college smoothes one's path in life.

But maybe the kids who got into Yale were simply more talented or hardworking than those who got into Tulane. To adjust for this, Krueger and Dale studied what happened to students who were accepted at an Ivy or a similar institution, but chose instead to attend a less sexy, "moderately selective" school. It turned out that such students had, on average, the same income twenty years later as graduates of the elite colleges. Krueger and Dale found that for students bright enough to win admission to a top school, later income "varied little, no matter which type of college they attended." In other words, the student, not the school, was responsible for the success.

This is quite an interesting result, because it doesn't match up with either of the standard hypothesis for the education premium--the fact that people with college educations make more money.

The first hypothesis, which I'll call training is that education actually teaches you stuff that improves your job performance. So, for instance, if you're going to be a computer programmer it might be helpful to take some classes in computer programming. Naturally, then, people who get college degrees will tend to have more marketable skills and be able to make money.

The second hypothesis, called signaling, is that education is a way of demonstrating your abilities. In many jobs, what you want is for the employee to be smart and dedicated. You need to be smart and dedicated to get a college degree and so getting one is a good way of showing that to your employer. Thus, an employer will be willing to pay more for people who have college degrees even if their education didn't give them any relevant skills.

You can apply similar reasoning to the salary premium commanded by graduates of elite universities: in a training view, going to Harvard actually teaches you stuff which will make you more effective later in life--stuff that you wouldn't have learned going to, say University of Connecticut. In the screening view, the people who get into Harvard are smarter than the people who get into UConn--and employers know this--so they're more interested in hiring them. In essence they can use admission to an elite college as a proxy for underlying applicant quality, without having to measure it directly.

This result doesn't neatly fit into either view. Obviously, if people who attend an elite school don't make more money than those who are accepted but don't attend, that really damages the training hypothesis. If elite schools teach you stuff, then the people who actually attend them should make more money. However, this data it doesn't really support the signaling hypothesis either.

Say that each employee has some underlying quality value Q and that Q is correlated to later earnings. Now, the fact that people who are accepted to elite schools tend to earn more is easily explained by arguing that the admissions process attempts to measure Q and that people with high Q tend to get into the elite schools. No problem there: it looks like the admissions process is pretty efficient. But if the process is so efficient, then why don't employers care about it? Everyone who attended an elite school was necessarily accepted and therefore is likely to have a high Q value. Now, to be sure, some of the people who didn't go to elite schools were accepted, but most weren't. So, people who attended elite schools are likely to have high Q values. Why aren't employers willing to pay a premium for high-Q employees?

One possibility is that they are, but that the effect fades awy. Reading the original paper, it appears that the salaries used are from people who have been out of school for some time. So, it may be the case that starting salaries are higher but that long-term salaries are more affected by actual performance and therefore directly measure Q, rather than relying on signalling from college attendence.

Posted by ekr at September 8, 2004 10:43 AM | TrackBack

Comments

Having hired dozens (if not hundreds) of corporate workers, I can tell you that a good school on resume is like a cherry on the sundae; it makes you feel better about your decision, but doesn't really impact it that much.

If you really want to see what impacts hiring decisions, check out the following article by Malcolm Gladwell.

http://www.gladwell.com/2000/2000_05_29_a_interview.htm

Posted by: Kilroy Was Here at September 8, 2004 09:46 PM

I guess just about every discussion here boils down to economics...

The "structured interview" process hailed in the article gives an interpretation which indicates a lack of economic understanding.

"`You're in a situation where you have two very important responsibilities that both have a deadline that is impossible to meet. You cannot accomplish both. How do you handle that situation?'

"`Well,' I said, `I would look at the two and decide what I was best at, and then go to my boss and say, "It's better that I do one well than both poorly," and we'd figure out who else could do the other task.'

"Menkes immediately seized on a telling detail in my answer. I was in-terested in what job I would do best. But isn't the key issue what job the company most needed to have done? With that comment, I had revealed some-thing valuable: that in a time of work-related crisis I start from a self-centered consideration. `Perhaps you are a bit of a solo practitioner,' Menkes said diplomatically. `That's an essential bit of information.'"

First, Menkes defines both responsibilities as "very important", and then takes that information away from the interviewee when evalutating the response. Then she completely ignores comparative advantage.

I wouldn't just refuse to use her techniques--I would through her out the door & refuse to tell her why until she refunded my money--after all she might give this bogus advice to my competitors!

Posted by: Nathan Zook at September 9, 2004 06:50 AM

I'm guessing that students who got into Harvard and chose instead to attend a less prestigious school, say Tulane, would end up graduating close to the top of their class (by the argument that Harvard admits people with higher Q).

So employers recruiting at Tulane may very well offer higher starting salaries to students with high GPA. Also, the top students are likely to get more offers and hence have more choices about their career options.

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