Tyler on Signaling: Even the New and Improved Version Doesn't Cut It
By Bryan Caplan
I’m frankly puzzled by Tyler’s latest attack on the signaling model of education. Not only does he merely repeat an argument that I previously answered; but he fails to tell readers about a new and improved version of his argument that he told me last week. Now I’m stuck explaining his original argument, his improved argument, and what’s wrong with both. Oh well, here goes:
1. Tyler’s original argument. Gary Becker said it first, but Tyler independently discovered it:
How can ?? years of schooling be needed to signal your quality, if your employer often knows your quality within months?
2. My original answer.
Sure, employers eventually figure out how productive a worker is IF they hire him. But interviewing is expensive, and so is getting rid of disappointing workers. So it still makes sense to use credentials to make interviewing and hiring decisions: You save valuable time, and reduce the chance of hiring unproductive workers.
3. Tyler’s improved argument from last week’s lunch. If (as Tyler claims to know from experience) employers know your true productivity after 3 months, why doesn’t the typical firm enter the worker quality certification industry? You work at a reduced or negative wage to get an employer to give you a chance, the employer treats you like a normal worker, and after three months, it certifies your quality for the whole labor market. You save years of your life, and the firm shares information it would have gotten anyway.
4. My replies to Tyler’s improved argument.
First, if workers knew their whole future depended on their employer’s three-month review, almost everyone would try hard, so you wouldn’t learn much about workers’ conscientiousness (one of the main traits that I believe that education signals). As I said earlier, “But why does school have to go on for years? Simple: Even a lazy weirdo can pretend to be hard-working and conformist for a few months.”
Second, it would be a lot harder for employers to discover worker quality in three months if they didn’t use educational credentials to pre-screen their hires. It’s relatively easy now because employers already cut off a huge left tail of the distribution of workers. In other words, the inframarginal cost of judgment worker quality may be low, but that doesn’t mean that accepting more workers and rating them is cheap.
Third, hiring bad workers and seeing how well they do is likely to be very expensive. Employers could give workers fake work to reduce the cost, but at minimum new workers will waste the valuable time of experienced workers. (And before Tyler can say, “Aha! So schooling is a more efficient way to ascertain quality!” let me remind the reader about how heavily we heavily subsidize schooling).
Fourth, even if Tyler can figure out worker quality in three months, it doesn’t mean the typical employer has this ability. Tyler has many unusual abilities.
Fifth, and perhaps most importantly, Tyler’s idea is weird – and weirdness is one of the qualities that we go to school to prove that we don’t have. Let’s put it this way: Suppose you announce that your firm is going to start selling worker certification on the side. A bunch of workers show up who want to skip college. Some may be smart, creative people; but most of them are going to be slackers and weirdos. If there are enough weirdos in your pool, and enough error in your grades, merely accepting your offer will brand workers as undesirable to the outside market.
If this seems odd, let me point out a much simpler way to get around signaling that I’ve previously discussed. You apply, without credentials, for a job that normally requires a college degree. You credibily offer the employer a money-back guarantee. Do you think you’ll get the job? It’s possible; but it’s also quite likely that the employer will think, “This guy isn’t normal; who knows what kind of damage he’ll do?” In fact, the most likely scenario is that you won’t get an interview, even if you attach your money-back guarantee to your resume. Whoever reads the resumes will laugh, then put your application in the trash.
Let me end with a challenge to all the economists who dismiss the signaling model of education on theoretical grounds: Almost all economists already admit that labor markets, competitive though they are, adjust slowly in the face of unemployment. Why is it so hard to believe that labor markets suffer from another major problem, too? If you can believe that labor markets are not evolving into spot markets, why can’t you believe that labor markets are stuck in a socially inefficient signaling equilibrium?