Saturday, February 1, 2014

College: Signal vs. Substance

I really would like to agree with Bryan Caplan.

A debate rages about the importance of signaling in higher education. On this theory (in the extreme formulation) employers either can't or don't want to determine how good an employee you will be, and hence they judge entirely by a quasi-relevant signal: education. Thus somebody with a high school diploma will be hired over a dropout. A baccalaureate degree holder will win over a high school graduate, and a masters degree will trump both of them. Never mind that nobody learned anything relevant to their job--only the signal counts.

Evidence cited by signalers includes the growth in the number of jobs that now require a bachelors degree. Increasingly, baristas have college educations these days. A high school diploma, formerly the entree into the workforce, now counts for very little. The whole education system is nothing but an arms race, where each contestant tries to be better educated than his neighbor. It's like the two campers running away from a bear: "I don't need to run faster than the bear," says one. "I just need to run faster than you."

On the signaling theory, college attendance, while good for individuals, from society's standpoint is a complete waste. Most employees would perform just as well if they'd never gone to college at all. Thus the signaler's goal is to defund higher education and dissuade as many people as possible from going to college. Champion signalers are Peter Thiel and Bryan Caplan.

The opposing view is held by people who argue that college is an investment in human capital. In extreme form, these folks hold that every moment spent in any college classroom is time irreplaceably well-spent. Your career and life will be worth infinitely more if you go to college--something that everybody should do. The entire college-industrial complex has bought this line to the hilt, and they invent increasingly silly terminology to justify their case.

Critical thinking skills is a term that gets my goat--if you think at all critically about it, it dissolves into complete meaninglessness. And yet mult-year long, general education programs are devoted to this mirage. Any otherwise useless class is justified because it enhances "critical thinking skills." Conversely, nothing remotely practical does any good. In reality, critical thinking skills are just a synonym for the classes that the faculty want to teach.

At least two issues complicate any analysis. First is ability bias, i.e., smart students go to good colleges and get good jobs. The latter two are correlated because both derive from the student's innate ability. But it seems to me ability bias is just signaling in disguise--smart students signal their ability by going to a good college. They don't necessarily learn anything there.

The second issue is rent-collecting using a credential. For example, one can't be a lawyer without a law degree--so the money lawyers earn has less to do with ability or signal, but rather because they own a credential. Rent collecting is a serious problem caused by government licensure and regulation, but is beyond the scope of this post.

In the post linked above Mr. Caplan claims the value of education is 50% ability bias, 40% signaling, and only 10% human capital investment. As said, I think ability bias and signaling are almost the same thing, so what he's really saying is that only 10% of the "value" of education comes from actually learning something. I think that estimate is too low. I'll provide three examples.

First, in my old age I aspire to be an amateur economist. I have no formal education in the discipline. Unlike my professional colleagues, I read what I want and don't read what I don't want. That means I see only those bits of the discipline that interest me, and indeed, may grossly misunderstand parts of it. Not getting systematic feedback is a major handicap. So formal education in economics is worth something--certainly more than 10%. (That said, we amateurs are unpolluted by the fads and fancies of the in-crowd, which I suppose gives us an advantage.)

Second, my daughter has an English degree. She has a job where she uses her degree. I have pressed her repeatedly on this issue: Do you really use anything you learned in school? Her answer is always "yes." If she hadn't read good literature and written term papers, it would have been impossible for her to do her job. Yes, in principle she could have learned on the job, but her employer wouldn't have had the patience for that. (That said, she got the job because her boss is an alum of the same school. That fact made her resume stand out. So perhaps signaling got her the job, but it didn't make her successful at it. There was a real capital investment.)

Third, I have former students who say that the most important stuff they learned in college was general chemistry. Again, there is some capital investment going on--it's not all signaling. (That said, this feedback dates mostly from the 1990s. I think general chemistry is much less useful today than it was back then--those old jobs are being automated. Today it's more about signaling or credentialing.)

So I don't agree with Mr. Caplan. There is more to education than signaling--certainly more than 10%. In his emphasis on signaling Mr. Caplan misses two big problems with higher ed.

First, there's some debate these days about what is capital and what isn't. The concept of human capital is particularly fuzzy, especially since the return is paid as wages. So think about it this way. Suppose the value of labor is $10/hour--that's what a cleaner or a fast-food worker makes. Any reasonably competent worker can get a job at that wage (give or take).

People with bachelors degrees often make considerably more than that, my daughter included. The extra derives from some human capital investment--in this case education. Signaling may be useful in getting a job (cf. my daughter), but it won't make you successful at it. As wages these days approach market rates, the signaling effect washes out, but the capital return remains.

Second, the problem with college isn't signaling, but rather irrelevance, making it an increasingly poor investment. This is partly caused by technological change. There is little in the general chemisty class, for example, that a computer can't do better than you can. Many fewer students need to study general chemistry these days. This effect is accentuated by the tenure system which enshrines old ways of doing things. My colleagues and I are still preparing students for the class of 1995.

So I don't agree with Mr. Caplan's signaling thing. But I do agree with his prescriptions. College needs to be cheaper, and taxes have to be lower. Government should disinvest from higher ed.

Further Reading:

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