Quantifying the Signaling Role of Education

This paper quantifies the signaling role of education and measures the associated efficiency losses from asymmetric information. To that end, I model educational attainment and occupational choices in an asymmetric information environment with employer learning and socially productive education. The model highlights how occupational sorting and the pace of employer learning jointly determine the strength of the signaling motive in equilibrium. I estimate the signaling role of education versus human capital by relating differences in employer learning across occupations, which generates variation in signaling incentives, to the distribution of ability and educational attainment by occupation. The estimates suggest that the role of job market signaling relative to the human capital model is 23 percent. On the margin, a year of additional schooling raises productivity by 6.4 percent and the return to signaling is 2.4 percent. In a counterfactual analysis, eliminating asymmetric information reallocates labor from education to workforce participation and improves occupational sorting. Aggregate efficiency gains are equivalent to 7.6 percent of lifetime earnings.