Econ Duel: Is Education Signaling or Skill Building?

Alex's office is just down the hall from mine. He and I write a blog together and we've been arguing for 25 years now. So we thought we'd do some arguing for you. This is about education. Alex thinks education is mostly about signaling, namely demonstrating to the outside world your underlying level of talent. Whereas I think education is mostly about learning. So Alex, why don't you just tell us a bit about how wrong you are?

All right, but let's be clear first about what we're arguing about. It's very obvious that people who go to college earn more. Their incomes are higher. The question is, why? So I see there's three basic views. The first view is that the people who go to college are just smarter, they have higher IQ, more ability, something like that. And that view says that if these people didn't go to college, they'd still be earning more because of their natural abilities. The second view, the human capital view, is that people are actually learning something in college which is increasing their productivity. This is the highly optimistic Tyler view.

That's my view, yes.

And then we get to the correct view. So the correct view, the signaling view, is that by going to college, people are sending a signal to the job market that they have higher IQ or have greater ability, but if they didn't send that signal, if they didn't go to college, their income would be much lower. So you've got to send the signal to get the higher income.

It's funny but most people who believe in the signaling theory, they actually learned it in school.

Well, we've got to learn something in school.

Here's the striking thing about education. If you put an extra person through college, and they're earning more, many, many years later. It's because they learned something. If it were just a signal, they might start off with a better job, but then the world would see, well, they really hadn't learned much and over time, their earnings would decline.

Well, oddly you think that the market is more efficient than maybe even I do. Look, take a look at the peacock's tail, a classic example of a signal. So the peacock is signaling that it's macho, it's got lots of good genes. Evolution has had hundreds of thousands of years to come up with a better way of doing this. The peacock's tail is a big waste. If evolution couldn't have figured out a way out of this signaling problem, then maybe the private markets can't do so either.

Peacocks can't just go up and take the SATs or any other standardized test. If education were just about a signal, it would be very easy to cut out the middle man of the college, give everyone an SAT or IQ test, and just send them to the jobs they ought to be at. But no, people need social context. They need to learn critical thinking. They need to learn creativity. And all of that goes on in higher education.

Look, it's not just about IQ. We all know smart people who have lots of trouble in the workforce. You've actually got to do something hard. And it is hard. Most people don't like education, so it's hard for them to get a degree. You've got to demonstrate some persistence. So it's not easy to find a way of-- something which is hard. It's not easy for the private markets to find a way of duplicating this. Especially when everyone is doing it already. It looks really odd for a smart person not to have a college degree today.

We pay you a salary at George Mason and we pay you most of all because of what you know and what you do, right? Not because of signaling. Signaling may be true in the short run... your first job, you have a fancy degree... but over time, the market sorts out who is productive and who is not.

Getting that credential though, it's so important. Even to get a job as a street sweeper today, you need a degree. And that's not because you learn anything about street sweeping. It's because people require this credential and that increases their wages.

A lot of what you learn in education, it's not just the facts or the textbooks, it's about social context. It's about dealing with different personality types. It's about how to submit to authority. It's about how to be conscientious in all the right ways. So when employers want a degree, it makes a lot of sense actually. You're getting the workers who have learned a bunch of things.

Just getting your foot in the door is a huge amount of your entire future career. Let's imagine, you went to Harvard, suppose you didn't go to Harvard, okay? I think you'd be doing pretty well. You have ability, high ability bias, okay? You'd be writing for newspapers or something like that. But you wouldn't have been able to be a professor. Without that credential in your hand, you wouldn't be teaching at George Mason today. I think your income would be lower. You'd still be famous, but your income would be quite a bit lower.

But look, even if you look at self-employed people, when they're better educated they learn more. And that's not a question of getting a foot in the door. These are people who work for themselves. What you learn from school is a lot about social context, and authority, and making connections, and figuring out a big picture of how the world works. You might earn a skill, too. Would you want to drive over a bridge built by an engineer who had not gone to Caltech? Probably not.

Well, that's a very nice story to tell, that education teaches these social goods and interaction with people. It's kind of funny though, isn't it, to say that what we're really teaching is stuff that we're not actually teaching? I don't actually teach those skills, but students just get them by osmosis? That seems hard to believe.

Funny but true. And look, when you teach, you should pull your students aside and say, "Look, here's how it really works. Here's what the profession is really like." But you're communicating things to them which are deeper than what you intend at any point in time. Yes, that's true.

I don't know. I'm not sure I'm doing all of that. Maybe you are. Look, let me give you an example.

Maybe we should pay you less.

Shh. Let me give an example. Sometimes when I'm teaching, I've got to go give a talk at another university, or go on a trip or something like that, and I tell the students, "Next week, class is canceled." And they're happy, they're pleased, okay? Maybe that's a little embarrassing to me, but it seems peculiar, right? If you went to the store and you asked for a pair of jeans and they gave you less, they gave you a pair of shorts instead, you'd be upset. But when you tell the students, "You're going to get less education," they're not upset. Well, why not? They're not upset because they know they're still going to get the degree, and that's what counts. Let me ask you, what would you rather have? Would you rather have a Harvard education without a degree? Or would you rather have the Harvard degree, the piece of paper, without the education?

Look, the question isn't one or the other. When you look at the data, people in Scandinavian countries, laws were changed, people had to acquire an extra year of schooling, which was not in any simple way visible on their resumes and still years later they earned more because they learned more. Look at the economic growth miracles: South Korea, Singapore, China. They invested in human capital, developed highly talented labor forces. Could Singapore be a leader in biomedical technology without good educational institutions? No way.

These countries were growing before they started to invest in education.

And they were able to upgrade because they then educated.

There's also a lot of countries which invested huge amounts of education, they didn't grow at all. In Africa, what happened there? In Africa, they invested a lot in education and they haven't grown. This massive push we have in the United States that everybody has to have a college education, I think that's actually a problem. Because what's really going on is by forcing or by pushing everybody into a college education, we're raising their wages, yes, but at the expense of people who don't want a college education or who don't have those abilities. So in part there's an negative externality there. Pushing so many people to get a college education means that other people, their wages are being lowered. And we need to think about those other people as well.

I agree that's often a problem, but that's largely because our K through 12 systems are sometimes junk. So the problem there is actually not enough education at earlier levels. Let's look at South Korea, maybe the world's greatest economic growth miracle ever. Eighty percent of South Koreans finish with some kind of higher education degree. And you see the results in their economy.

Sure, South Korea is great, but there are a lot of countries which as I said, invested in education and they're doing no better off.

You need more than just education, that's true. But the potential impact of education--

Again the magic view: You need something else... It's some combination...

You need good infrastructure. You need good governance, right? It's not only education, no one never claimed that.

But look, when you go and you actually get down to the nitty gritty, what do students remember? They don't even remember what they learned a year ago. So how can what students learn today be increasing their productivity 20 years from now if they can't even remember what they learned a year ago?

They learned critical thinking. They learned creativity. They learned social context. They carry that with them, even if they don't remember what we taught them about the elasticity of the demand curve. "Elastic, inelastic, which is which? My goodness!" But that's maybe not what they need to know. It's a way of thought, a way of approaching the world. It's an acculturation. It's a way of advancing into a higher socioeconomic stratum. And mostly it works... when it's good.