Bryan Caplan, Professor of Economics at George Mason University, challenges the belief that college students are more valuable due to technological advancements. He discusses the puzzle of low graduation rates despite increasing returns to graduating. Caplan explores the misinterpretation of graduation rates and the role of choice of major in determining earnings. He questions the necessity of spending years in college to prove one's worth as a worker and discusses the influence of government subsidies on education. Caplan argues against increasing subsidies, as the return on education is not high for marginal students.
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Quick takeaways
The monetary benefits of a college education primarily come from signaling rather than the knowledge learned.
The debate between the signaling and human capital models centers around whether education transforms individuals or simply filters out those with favorable characteristics.
The sheepskin effect supports the signaling model, indicating that education serves as a signal of desirable qualities like work ethic and conformity.
Deep dives
The Return on Education is Heterogeneous
The return on education is not the same for everyone. The average college graduate earns 83% more than a high school graduate, but this figure is misleading. College graduates have many other advantages besides education, such as higher intelligence, work ethic, and conformity. The 83% figure includes the benefits of these advantages, not just the benefits of education itself.
Signaling versus Human Capital
There are two main theories to explain the relationship between education and earnings: the signaling model and the human capital model. The signaling model suggests that education serves as a signal to employers of an individual's underlying abilities, rather than providing practical job skills. The human capital model argues that education enhances an individual's productivity by providing valuable skills and knowledge. The debate between these models centers on whether education actually transforms individuals or simply filters out those who have favorable characteristics.
Measuring the Return on Education
Measuring the return on education requires considering the selection bias between college graduates and high school graduates. Research shows that individuals who choose to attend college and graduate are already more likely to have higher intelligence and other favorable traits before they even begin their education. Therefore, simply comparing the earnings of college graduates to high school graduates does not accurately represent the true impact of education on earnings. It is important to account for the inherent advantages and characteristics of college graduates when estimating the return on education.
The Signaling Model: Balancing Importance
The podcast episode discusses the ongoing debate between the signaling and human capital models in relation to the value of education in the labor market. While most labor economists tend to downplay the significance of signaling, the speaker argues that signaling plays a much larger role, accounting for around 80% of the value employers place on education. By analyzing evidence from various fields such as educational psychology and sociology, the speaker suggests that this higher percentage of signaling is often overlooked or disqualified by mainstream labor economists. The speaker encourages a more comprehensive examination of evidence and personal experiences to challenge the dominant view.
The Sheepskin Effect and Evaluating Education
The episode explores the sheepskin effect, which refers to the substantial increase in earnings that comes with completing a college degree compared to not finishing. This effect, along with other indicators, supports the signaling model. Despite the crummy educational systems in some countries, even acquiring an education that doesn't necessarily provide substantial learning still leads to higher earnings. The speaker argues that this is due to employers using education as a signal of certain desirable qualities, such as work ethic and conformity. The data also reveals that the years of schooling factor alone does not fully correlate with increased earnings, highlighting the complexities of evaluating education's impact on the labor market.
Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about the value of a college education. Caplan argues that the extra amount that college graduates earn relative to high school graduates is misleading as a guide for attending college--it ignores the fact that a sizable number of students don't graduate and never earn that extra money. Caplan argues that the monetary benefits of a college education have a large signaling component rather than representing the value of the knowledge that's learned. Caplan closes by arguing that the subsidies to education should be reduced rather than increased.
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