AN ALTERNATIVE VIEW OF EDUCATION: SIGNALING

Earlier we discussed the human-capital view of education, according to which schooling raises workers’ wages because it makes them more productive. Although this view is widely accepted menisci economists have proposed an alternative theory, which emphasizes that firms use educational attainment as a way of sorting between high ability and low-ability workers. According to this alternative view, when people earn
a college degree, for instance, they do not become more productive, but they do signal their high ability to prospective employers. Because it is easier for high-ability people to earn a college degree than it is for low-ability people, more high-ability people get college degrees. As a result, it is rational for firms to interpret a college degree as a signal of ability.

The signaling theory of education is similar to the signaling theory of advertising discussed in Chapter 17. In the signaling theory of advertising, the advertisement itself contains no real information, but the Finn signals the quality of its product to consumers by its willingness to spend money on advertising. In the signaling theory of education, schooling has no real productivity benefit, but the worker signals his innate productivity to employers by his willingness to spend years at school. In both cases, an action is
being taken not for its intrinsic benefit but because the willingness to take that action conveys private information .

Thus, we now have two views of education: the human-capital theory and the signaling theory. Both views can explain why more educated workers tend to earn more than less educated workers. According to the human capital view, education makes workers more productive; according to the signaling view, education i7 correlated with natural ability. But the two views have radically different predictions for the effects of policies that aim to increase educational attainment. According to the human-capital view, increasing educational levels for all workers would raise all workers’ productivity and thereby their wages.

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