The Job-Market Signalling Model.
According to the work of Nobel Laureate Michael Spence, educational credentials signal to employers the value that an employee can offer to a firm. Education involves a series of tasks which prove that the student can meet deadlines, arrive on time, and handle responsibility. Most importantly, by purchasing education, the student conveys information about his or her productivity. The need for signalling arises due to limitations on the access to information in the market. Due to a phenomenon referred to as the Sheepskin Effect, the signal, i.e. a degree, can have value to an employer regardless of whether it contributes to the potential employee’s productivity. This applies particularly in domains of study which do not have a focus on "technical" training, such as gender studies, history or anthropology. This suggests, then, that undergraduates can improve their human capital by entering a technical field or actively seeking to gain skills which boost productivity. By taking on a business venture, college students can receive the best of their plan-of-study and still build human capital.
One of the first things I learned as an undergraduate was the idea of opportunity costs. In fact, on page 4 of my macroeconomics textbook used higher education as an example of how opportunity costs work. This was even before I knew about signalling - a concept introduced later in the course. The text defines opportunity costs of a choice as "the value of the opportunities lost."
In the context of higher education, the opportunities lost are measured by the cost of tuition, books, and potentially room and board. Although students would have had to pay for room and board if they weren't students, the cost of room and board at college is often more expensive than other living situations. In addition, though, another opportunity cost is time, which can be measured as wages foregone (which can range anywhere from 15k to 35k/year for a worker with just a high school diploma). This means that at a typical state college, the highest cost of attendance is not even the tuition students pay. I'm surprised how little this is mentioned when media outlets cover the student loan crisis and unemployment among Gen-Y.
I also found out that there is a tendency for college enrollment to increase with unemployment. It makes sense since the opportunity costs are lowered if a person couldn't have gotten a job straight out of high school i.e. no wages foregone by attending college.
The list goes on. There are plenty of statistics related to higher education as well as other economic ideas that gave me a broader perspective on the decision to attend university. Taking macroeconomics was not required for the engineering track I was on, yet that was the class in which I learned the most that semester. Does it mean I should have changed majors? It could be a reason but I don't interpret this as a sign that economics was my special, true calling. My interpretation is that (1) we do well in subjects we like, (2) we do well in subjects that are taught in an engaging way and (3) there is always an initial barrier to liking a subject so I could theoretically like anything else just the same. The signalling narrative says that colleges just put a sticker on the students that were already smart and ambitious. Likewise, since I was already interested in economics I would have learned these things over time regardless of whether I took the class i.e. my grade at the end was just a signal of that interest, prior knowledge, etc.
Understanding key ideas in the field of economics brought me one step closer in my "peregrination" towards a deep interest in the future of higher education. In Miguel Street (the book I themed this blog after), Titus Hoyt, a scholarly man in a modest Trinidadian community, helps a lost boy find his way home. Later, he helps him write a letter to the Guardian about the experience.
"This, dear Mr Editor, was my first peregrination (p-e-r-e-g-r-i-n-a-t-i-o-n) in this metropolis, and I had the misfortune to wander from the path my mother had indiciated [sic]" (Emphasis mine)
I suppose you might say that in all things college education, economics is my Titus Hoyt and American Culture is analogous to "my mother." At times it feels like it doesn't matter what the numbers say and that whatever culture dictates takes precedence. Yet, all Millenials can benefit from understanding the economics of higher education.
For more economics and stats on college, try Marginal Revolution.
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