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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 '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.

Suggested Citation

  • Joseph G. Altonji & Charles R. Pierret, 1996. "Employer Learning and the Signaling Value of Education," NBER Working Papers 5438, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5438
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    References listed on IDEAS

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    1. Holzer, Harry J, 1988. "Search Method Use by Unemployed Youth," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 1-20, January.
    2. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
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    Cited by:

    1. Murnane, Richard J. & Willett, John B. & Braatz, M. Jay & Duhaldeborde, Yves, 2001. "Do different dimensions of male high school students' skills predict labor market success a decade later? Evidence from the NLSY," Economics of Education Review, Elsevier, vol. 20(4), pages 311-320, August.
    2. Heisz, Andrew & Oreopoulos, Philip, 2006. "The Importance of Signalling in Job Placement and Promotion," Analytical Studies Branch Research Paper Series 2006236e, Statistics Canada, Analytical Studies Branch.
    3. John H. Tyler & Richard J. Murnane & John B. Willett, 2000. "Do the Cognitive Skills of School Dropouts Matter in the Labor Market?," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 748-754.
    4. Galindo-Rueda, Fernando, 2003. "Employer Learning and Schooling-Related Statistical Discrimination in Britain," Royal Economic Society Annual Conference 2003 82, Royal Economic Society.
    5. Carrillo-Tudela, Carlos & Kaas, Leo, 2015. "Worker mobility in a search model with adverse selection," Journal of Economic Theory, Elsevier, vol. 160(C), pages 340-386.
    6. 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.
    7. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
    8. 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, vol. 17(3), pages 534-569, July.
    9. Perri, Timothy J., 2002. "Signaling versus contingent contracts with costly turnover," Journal of Economic Behavior & Organization, Elsevier, vol. 48(4), pages 365-374, August.
    10. Tyler, John H., 2004. "Basic skills and the earnings of dropouts," Economics of Education Review, Elsevier, vol. 23(3), pages 221-235, June.
    11. Joseph G. Altonji & Charles R. Pierret, "undated". "Employer Learning and Statistical Discrimination," IPR working papers 97-18, Institute for Policy Resarch at Northwestern University.
    12. Albareto, G. & Mistrulli, P.E., 2010. "Bridging the gap between migrants and the banking system," MPRA Paper 26476, University Library of Munich, Germany.
    13. 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.
    14. Heisz, Andrew & Oreopoulos, Philip, 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.
    15. H. J. Holzer, "undated". "Employer skill needs and labor market outcome by race and gender," Institute for Research on Poverty Discussion Papers 1087-96, University of Wisconsin Institute for Research on Poverty.

    More about this item

    JEL classification:

    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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