When people weigh the plausibility of the signaling model of education, they focus on the ease of on-the-job incompetence detection.  If it only takes a couple of months to notice that a person’s credentials overstate their performance, how important can signaling be? 

I’ve responded to this objection before, but recently realized that I’ve neglected a parallel problem.  Suppose for the sake of argument that employers can quickly figure out whether an employee is a “lemon.”  A serious knowledge still remains: Figuring out whether an employee is a “diamond in the rough.” 

Example: Suppose you’re the manager in a Starbucks.  How long does it take you to figure out if one of your baristas has the right stuff to become a Starbucks executive?  What are the odds that you totally miss a workers’ untapped potential?

If you’re willing to admit that diamond-in-the-rough detection is unreliable at best, you’ve opened another door to the signaling model.  If you’re a potentially awesome but unappreciated worker, extra education is a great way to get the market’s attention.  Employers hiring for better jobs are a lot less likely to throw your application in the circular file if you’ve got the right diplomas.

But isn’t this process productive, broadly defined?  At some level, sure.  But as always in signaling models, there are negative externalities at the margin.  If everyone signals for four extra years, this doesn’t improve the quality of our signal; it just waste four years of time and resources.  But that’s from a social point of view.  Selfishly speaking, “wastefully” signaling for four extra years can still enrich you by making you look better relative to competing workers.  It’s just like standing up at a concert to see better: You make yourself better off by making everyone else worse off – and burn socially valuable resources in the process.

P.S. Here are my Powerpoint slides on signaling from a recent IHS seminar.