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Employer Learning and the Signaling Value of Education

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  • Joseph G. Altonji
  • Charles R. Pierret

Abstract

If profit-maximizing firms have limited information about the general productivity of new workers, they may choose to use easily observable characteristics such as years of education to Òstatistically discriminateÓ among workers. The pure credential value of education will depend on how quickly firms learn. To obtain information on employer learning, we work with a wage equation that contains both the interaction between experience and a hard-to-observe variable that is positively related to productivity, and the interaction between experience and a variable that firms can easily observe, such as years of education. The time path of the coefficient on the unobservable productivity variable provides information about the rate at which employers learn about worker productivity. Using data from the NLSY we obtain preliminary estimates of the rate at which employers learn about worker quality and use these, along with some strong auxiliary assumptions, to explore the empirical relevance of the educational screening hypothesis. We show that even if employers learn relatively slowly about the productivity of new workers, the portion of the return to education that could reflect signaling of ability is limited.

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Paper provided by Institute for Policy Resarch at Northwestern University in its series IPR working papers with number 96-11.

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Handle: RePEc:wop:nwuipr:96-11

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References

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  1. Harry J. Holzer, 1986. "Search Method Use by Unemployed Youth," NBER Working Papers 1859, National Bureau of Economic Research, Inc.
  2. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 972-90, October.
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Cited by:
  1. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
  2. Tyler, John H., 2004. "Basic skills and the earnings of dropouts," Economics of Education Review, Elsevier, Elsevier, vol. 23(3), pages 221-235, June.
  3. Albareto, G. & Mistrulli, P.E., 2010. "Bridging the gap between migrants and the banking system," MPRA Paper 26476, University Library of Munich, Germany.
  4. John H. Tyler & Richard J. Murnane & John B. Willett, 1999. "Do the Cognitive Skills of School Dropouts Matter in the Labor Market?," NBER Working Papers 7101, National Bureau of Economic Research, Inc.
  5. Perri, Timothy J., 2002. "Signaling versus contingent contracts with costly turnover," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 48(4), pages 365-374, August.
  6. Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning And Statistical Discrimination," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 313-350, February.
  7. Fernando Galindo-Rueda, 2003. "Employer learning and schooling-related statistical discrimination in Britain," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19491, London School of Economics and Political Science, LSE Library.
  8. Galindo-Rueda, Fernando, 2003. "Employer Learning and Schooling-Related Statistical Discrimination in Britain," Royal Economic Society Annual Conference 2003, Royal Economic Society 82, Royal Economic Society.
  9. Oreopoulos, Philip & Heisz, Andrew, 2006. "The Importance of Signalling in Job Placement and Promotion," Analytical Studies Branch Research Paper Series 2006236e, Statistics Canada, Analytical Studies Branch.
  10. H. J. Holzer, . "Employer skill needs and labor market outcome by race and gender," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1087-96, University of Wisconsin Institute for Research on Poverty.
  11. Michael J. Podgursky & Matthew G. Springer, 2007. "Teacher performance pay: A review," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 26(4), pages 909-950.
  12. Oreopoulos, Philip & Heisz, Andrew, 2006. "Importance des signaux de competence pour l'obtention d'un emploi et de l'avancement," Direction des etudes analytiques : documents de recherche 2006236f, Statistics Canada, Direction des etudes analytiques.
  13. Holzer, Harry & Neumark, David, 1999. "Are Affirmative Action Hires Less Qualified? Evidence from Employer-Employee Data on New Hires," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 17(3), pages 534-69, July.
  14. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201307, Department of Economics, University of St. Andrews, revised 14 Oct 2013.
  15. Richard J. Murnane & John B. Willett & Yves Duhaldeborde & John H. Tyler, 2000. "How important are the cognitive skills of teenagers in predicting subsequent earnings?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(4), pages 547-568.

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