Carleton University economist Frances Woolley has an interesting guest post at Worthwhile Canadian Initiative on the implications for policy of schooling as human capital versus schooling as a signal (sorting students by competence).
[I]f what is taught at universities actually makes people more productive, then simply taking university courses should be enough increase earnings. In fact, to get much of a payoff from university education, you have to finish your degree (the “sheepskin effect” ). One reason education pays is that completing a degree “signals” your ability, determination, competence and general stick-with-it-ness. ….
Ontario’s government is urging universities to increase retention rates, so everyone who starts university completes a degree. If the human capital theory is true, then this is sound policy: more students completing university means more human capital means a more productive economy. If, however, the value of university education is as a signal of ability, then one of the most important things that universities do is fail students. Unless some students fail, the ability to complete a university degree confers no special distinction on the graduate.
Whether or not human capital theory is true determines the best response to the demographic challenges much discussed this blog [sic]. If education makes people more productive, then more education can increase the productivity of our economy – possibly enough so that fewer workers are able to support the large number of pensioners. If, however, education is basically about sorting workers – if people are getting more and more degrees in hope of eventually capturing that one elusive stable professional job with benefits – then the best way of responding to the demographic crisis is to scale back post-secondary education. Doing so would effectively increase the size of the working age population substantially, easing demographic problems.
Frances Woolley, “Human capital: literal truth, fairy tale or myth?”, Worthwhile Canadian Initiative, 28 March 2010.
There is much more. Read the entire post. You will not be disappointed.
My favourite quote on this subject is from Harvard economist Lant Pritchett (1959-):
One way to distinguish the models of productive education from the signaling and distortion hypotheses about micro and macro returns is that the usual model is the MIT “engineering” metaphor in which education is subsequently used in innovation. The signaling model can be thought of as the “Harvard MBA” metaphor of education in which nothing is really learned but wages are higher because a highly ambitious group is pre-selected for employers. The “Harvard Law” metaphor is that in which wages are higher because real, privately valuable, skills are really learned, but these skills are of dubious social product.
Lant Pritchett, “Where has all the education gone?” World Bank, revised 21 December 1999, footnote 38, pp. 33-34.