Signaling and the Education Premium
AbstractA large portion of the rise in the education premium can be explained by a signaling theory of education which predicts that in the future, increases in the education level of the workforce will actually cause the education premium to rise, simply because different workers are being labeled as â€œhighly educatedâ€. This prediction is supported by past behavior of the high school education premium. It runs counter to the view that increases in the relative supply of high education workers will always lower educationâ€™s relative price. Suppose education does not affect an individual's productivity, but acts only as a signal of it because individuals select education based on their productivity, and wages are determined by productivity. It is shown that this implies additional education in the economy would not change the wage distribution. The education premium, or relative price of highly educated workers, is the ratio of mean high education wages to mean low education wages. If all workers gained more education, it would mean the â€œbarâ€ (or productivity minimum) for a given level of education was being lowered. For example, suppose â€œhighly educatedâ€ referred to a college education. If there were few college grads, lowering the bar (the most productive non-college grads becoming college grads) would reduce mean college wages significantly by adding lower productivity workers. Because there would be many non-college grads vs. college grads, a drop in the bar would cause a smaller fall in the mean non-college graduate wage by removing the most productive workers. It is shown that this implies the education premium would fall. However, if the bar was low enough so that there were many college grads and few non-college grads, the reverse would happen and further declines in the bar would cause educationâ€™s relative price to rise. This effect would not be due to real changes, but to changes in labeling. To measure how large this effect could have been, simulations were done to create counterfactual education premiums for three definitions of â€œhighly educatedâ€: (1) those with a college degree; (2) those with some college education; (3) those with a high school education. Premiums were created for the Census years 1950-2000 that hold the wage distribution the same as the previous decade, but allow the distribution of education across wage ranks to be the from the present year. These show what the premiums would have been if wages didnâ€™t change but education levels changed as in the data. The simulations for (1) and (2) perform as expected: the simulated premiums fall when there are more high education individuals, and this can explain some or all of the observed changes in the education premium between the past six decades of census data. However, (3) also acts as the model predicts: because this definition has many more highly educated individuals, further increases in the supply of highly educated individuals lower the counterfactual premium. Thus, this model predicts that as the number of college graduates rises, additional grads will eventually cause the premium to increase.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 397.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
signaling; education premium;
Find related papers by JEL classification:
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- I20 - Health, Education, and Welfare - - Education - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Card & John E. DiNardo, 2002.
"Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles,"
NBER Working Papers
8769, National Bureau of Economic Research, Inc.
- David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
- Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
- Claudia Goldin & Robert A. Margo, 1991.
"The Great Compression: The Wage Structure in the United States at Mid- Century,"
NBER Working Papers
3817, National Bureau of Economic Research, Inc.
- Goldin, Claudia & Margo, Robert A, 1992. "The Great Compression: The Wage Structure in the United States at Mid-century," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 1-34, February.
- Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
- Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
- Joseph E. Stiglitz, 1973.
"The Theory of 'Screening', Education, and the Distribution of Income,"
Cowles Foundation Discussion Papers
354, Cowles Foundation for Research in Economics, Yale University.
- Stiglitz, Joseph E, 1975. "The Theory of "Screening," Education, and the Distribution of Income," American Economic Review, American Economic Association, vol. 65(3), pages 283-300, June.
- Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.