Ability Bias vs. Signaling Again
By Bryan Caplan
[Bryan] cites the
signaling motives for education and concludes: “Here, the evidence
Tyler cites is simply irrelevant.” This is simply not true and indeed
these papers are obsessed with distinguishing learning effects from
preexisting human capital differences. That is what these papers are,
so to speak. In that context, “ability bias” in the estimates doesn’t
seem to be very large, see for instance the Angrist or Card pieces
linked to above. This paper
surveys some of the “adjusting for ability bias” literature; it is
considered quite “pessimistic” (allows for a good deal of signaling, in
Caplan’s terminology) and still it finds a positive five percent a year
real productivity gain from an extra year of schooling.
As a graduate of Princeton labor econ, I have to insist that Tyler continues to equivocate between two totally different things: Ability bias and signaling. The vast majority of the literature to which Tyler appeals focuses exclusively on the former. It tries to answer the question: “Does schooling really increase private earnings? Or is it merely due to self-selection? Or some mixture of the two?”
Aility bias has nothing to do with signaling. The signaling model says, “Of course schooling really increases private earnings. But why? Does it actually raise productivity? Or merely signal pre-existing productivity?”
To see the distinction more clearly, suppose every year of education appears to increase a worker’s income by 10%.
If ability bias fully explains this earnings premium, then the true private effect of education on income is ZERO. The private and social returns to education are EQUAL and NEGATIVE. (Why? Because you’re “investing” time and tuition, and neither the student nor society receives any financial return in exchange).
In contrast, if signaling fully explains this earnings premium, then the true private effect of education on income is 10%, exactly as naive estimates claim. The catch: While the private return to education is POSITIVE, the social return is NEGATIVE. (Why? Because the student invests time and tuition and receives a financial return without actually increasing production. He’s basically rent-seeking).
Bottom line: Using the return to education literature against the signaling model is totally misguided. Tyler might as well stand up at a concert to “prove” that everyone at the concert will see better if everyone stands up.