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Employer Learning and the Signaling Value of Education

  • Joseph G. Altonji
  • Charles R. Pierret

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 'statistically discriminate' 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5438.

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Date of creation: Jan 1996
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:5438
Note: LS
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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, vol. 87(5), pages 972-90, October.
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