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December 13, 2002
Years of education equals money

One of my favorite recent blogger discoveries is Ted Barlow. Like all good bloggers, he convinces you that he is telling it as he truly sees it, which made this slice of wisdom, from his piece called "A few things I've learned working in market research" all the more depressing:

- The correlation between income and education is one of the strongest I’ve ever seen in social science. It forced me to believe that parents who force their whiny children to stay in high school and go to college are doing their kids a great favor.

What depresses me is that I bet you anything this is true, at any rate the correlation. Ted Barlow says it, and so do a thousand other people. We live in a hideously credential-dominated society.

I suppose this comes of there being so many of us. As individuals, if we want to earn lots of money, we have to be constantly impressing strangers, and doing it quickly. That is to say, the impressing bit has to be doable quickly. It doesn't matter how long we stress and strain to prepare the impressive thing itself. And employers who want to get very rich can't only be making use of people they already know, or always be going to the immense trouble of finding out all about the real merits of the people they are considering employing. No way would exams disappear in a totally free educational market, where children were allowed to leave school at zero and go and work down coal mines or up chimneys if they wanted to. There'd be exams in that, too.

So, you get this self-fulfilling prophecy carved into the concrete foundations of our society. Clever people do lots of "education". Stupid people don't. It becomes true. If you drop out, you are stupid, because you are condemning yourself to a lifetime of either being asked why you dropped out so early and not having a really smooth answer, or of not applying for any of those jobs where you need a smooth answer. Result, you really do get your hands on a lot less money. It's true in the same kind of way that being a Soviet dissident meant that you really were crazy, because only a crazy person would take a serious public swipe at the government of the USSR.

And, before the commenters start in, it's even true despite the fact that "school leavers" are the very definition of stupidity. Despite that, it remains true that the longer you delay becoming a school leaver, the cleverer you nevertheless must be underneath all the stupidity, and the more they pay you, despite all your school acquired stupidity.

I remember being very scornful when I first learned about how the druids used to do upward social mobility by lying in a coffin full of ice-cold water all night with only their noses above water, composing Druidic poetry. Thank goodness we don't do that kind of thing now, I thought. Then I thought some more.

I wonder, if I keep this blog going for five solid years, with something here every Monday to Friday, with maybe extra somethings at the weekend, will that count as a qualification? Probably not. Doesn't show enough willingness to knuckle under and do as I'm told. I didn't know when I began it that it might count as a qualification, therefore it wouldn't. Only when it is ordained from on high that blogging can count as a course credit, will it do so. And my infinitely depressing point here is: this makes sense.

And a Merry Christmas to you all.

Posted by Brian Micklethwait at 11:26 AM
Category: Economics of education

There is a concept in economics going at least to an article by Michael Spence in the early 70s called, generically, signaling. (Actually, Spence won the Nobel Prize in 2001 in part for this paper.) In this context, education can be viewed as nothing more than a signal to employers about the productivity of an applicant. (Note that here and in what follows, I will use “productive” to mean whatever traits are necessary for some jobs but not for others.)

The story goes something like this. Some employers need to hire productive people, but they have no way of telling whether a given candidate is productive. Jobs which require productive people pay better. Candidates want to convince employers that they are productive, but they have no way of convincing them. Enter schools. Schools in this model have no benefit to productivity, but they do provide a solution to the problem. Productive candidates find school relatively easier/more enjoyable/whatever than non-productive candidates. Non-productive candidates will now find it better to admit to being non-productive and taking the resulting job than to pay the (expensive to them) price of going to school. The price for productive candidates is relatively lower and so they will be willing to pay it to identify themselves as productive and get the better job.

So, at the expense of having part of the population waste time going to school, we get the good outcome of productive people going to jobs which require them and non-productive people going to jobs which do not. In the absence of a better test for productivity, this is an optimal solution (within the context of the model).

It may be possible for some individuals to demonstrate themselves as “productive” without using the education signal, but so long as most can not, we will continue to see education leading to higher pay. (Of course, it is *possible* that education does actually increase productivity.)

As a side note, signaling has many other applications (of course). For example, consider car insurance deductibles. It is cheaper for good drivers to take higher deductibles than it is for bad drivers. Therefore, people choosing high deductibles can get lower insurance rates, even accounting for the reduction in net claim size from having the higher deductible.

Comment by: Steven Gallaher on December 13, 2002 03:43 PM

The harder it is to fire employees, the worse this problem gets. If hiring/firing costs and difficulties are minimal, then deciding whom to hire isn't an earth-shaking decision--the critical decisions are about who do you *keep* and *promote*, which decisions can be made on an ongoing basis, with the benefit of actually having observed the person's performance. On the other hand, if employees once hired are there for years, then employeers will be using every "signalling" point of data they can get.

Comment by: David Foster on December 15, 2002 04:34 AM

Isn't it fascinating that income and education go together in most places but not all?

The entrepreneur is so often one who side steps credentials and just does the business. Richard Branson comes to mind as a man who provides steak in tourist class with great movies for transatlantic flyers like me. On my last flight to the UK I even met the man. He is exactly the image he projects. Clearly his signaling methods work. Here is a man who can clearly enthuse others to create powerful and, above all, useful organizations. Forget the trains, no one has the full answer to that one yet. They will one day though.

The question that nags in my mind is this. Would he be so effective if he had an entrepreneur credential? You know the one, the ubiquitous MBA with a class in entrepreneurial studies. Me thinketh not.

Comment by: Howard Gray on December 19, 2002 02:50 PM
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