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Does Education Raise Productivity or Just Reflect It?

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  • Chevalier, Arnaud
  • Harmon, Colm
  • Walker, Ian
  • Zhu, Yu

Abstract

It is clear that education has an important effect on wages paid in the labour market. It is not clear, however, whether this is due to the role that education plays in raising the productivity of workers (the human capital explanation) or whether education simply reflects the ability of the worker (through a signalling role). In this Paper we describe and implement, using a variety of UK datasets, a number of tests from the existing literature for discriminating between the two explanations. We find little support for signalling ideas in these tests. We have, however, severe reservations about these results because of our doubts about the power of these tests and the appropriateness of the data. We propose an alternative test, based on the response of some individuals to a change in education incentives offered to other individuals caused by the changes in the minimum school leaving age in the 1970s. Using this idea, we find that data in the UK appears to strongly support the human capital explanation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3993.

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Date of creation: Jul 2003
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Handle: RePEc:cpr:ceprdp:3993

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Keywords: human capital; screening; signalling;

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References

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  1. Kelly Bedard, 2001. "Human Capital versus Signaling Models: University Access and High School Dropouts," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 749-775, August.
  2. Richard Blundell & Lorraine Dearden & Barbara Sianesi, 2004. "Evaluating the impact of education on earnings in the UK: models, methods and results from the NCDS," LSE Research Online Documents on Economics 19451, London School of Economics and Political Science, LSE Library.
  3. Lazear, Edward, 1977. "Academic Achievement and Job Performance: Note," American Economic Review, American Economic Association, vol. 67(2), pages 252-54, March.
  4. Dolton, Peter & Vignoles, Anna, 2000. "The incidence and effects of overeducation in the U.K. graduate labour market," Economics of Education Review, Elsevier, vol. 19(2), pages 179-198, April.
  5. Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning And Statistical Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 313-350, February.
  6. Robin Naylor & Jeremy Smith & Abigail McKnight, 2002. "Sheer class? The extent and sources of variation in the UK graduate earnings premium," LSE Research Online Documents on Economics 6393, London School of Economics and Political Science, LSE Library.
  7. Arnaud Chevalier, 2000. "Graduate over-education in the UK," CEE Discussion Papers 0007, Centre for the Economics of Education, LSE.
  8. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2001. "Dispersion in the Economic Return to Schooling," CEPR Discussion Papers 3037, C.E.P.R. Discussion Papers.
  9. William N. Evans & Edward Montgomery, 1994. "Education and Health: Where There's Smoke There's an Instrument," NBER Working Papers 4949, National Bureau of Economic Research, Inc.
  10. Stacy Berg Dale & Alan B. Krueger, 2002. "Estimating The Payoff To Attending A More Selective College: An Application Of Selection On Observables And Unobservables," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1491-1527, November.
  11. Hungerford, Thomas & Solon, Gary, 1987. "Sheepskin Effects in the Returns to Education," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 175-77, February.
  12. Taubman, Paul J & Wales, Terence J, 1973. "Higher Education, Mental Ability, and Screening," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 28-55, Jan.-Feb..
  13. Eugene A. Kroch & Kriss Sjoblom, 1994. "Schooling as Human Capital or a Signal: Some Evidence," Journal of Human Resources, University of Wisconsin Press, vol. 29(1), pages 156-180.
  14. Miller, Paul W & Volker, Paul A, 1984. "The Screening Hypothesis: An Application of the Wiles Test," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 121-27, January.
  15. Colm Harmon; & Ian Walker, 1995. "Estimates of Economic Return to Schooling in the UK," Economics, Finance and Accounting Department Working Paper Series n540195, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  16. Harmon, C & Ian Walker, 1995. "Estimates of the economic return to schooling for the UK," IFS Working Papers W95/12, Institute for Fiscal Studies.
  17. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
  18. Layard, Richard & Psacharopoulos, George, 1974. "The Screening Hypothesis and the Returns to Education," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 985-98, Sept./Oct.
  19. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  20. Groot, Wim & Oosterbeek, Hessel, 1994. "Earnings Effects of Different Components of Schooling: Human Capital versus Screening," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 317-21, May.
  21. Brown, Sarah & Sessions, John G., 1999. "Education and employment status: a test of the strong screening hypothesis in Italy," Economics of Education Review, Elsevier, vol. 18(4), pages 397-404, October.
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