See earlier posts here.
Worker Signals Among New College Graduates: The Role of Selectivity and GPA
Brad Hershbein - The University of Michigan
Recent studies have found a large earnings premium to attending a more selective college, but the mechanisms underlying this premium have received little attention and remain unclear. In order to shed light on this question, I develop a multi-dimensional signaling model relying on college grades and selectivity that rationalizes students' choices of effort and firms' wage-setting behavior. The model is then used to produce predictions of how the interaction of the signals should be related to wages. Using five data sets that span the early 1960s through the late 2000s, I show that the data support the predictions of the signaling model, with support growing stronger over time. I also discuss alternative explanations, including di fferent types of human capital models; provide robustness checks; and relate the findings to both the returns-to-college-quality and employer learning literatures.
From the introduction:
Recently, there has been a sizable interest in the return to attending a more selective or prestigious college. Students who attend more prestigious schools earn more over their lifetime, on average, than those who attend less selective schools, but the mechanism underlying this premium is not well understood. In particular, there is disagreement over whether the earnings di fference is primarily due to the college itself or whether it is driven by unobserved student characteristics. The first of these channels is consistent with human capital theory -- attending the more selective school actually makes the worker more productive -- and the second more closely accords with models of signaling -- more innately productive workers are more likely to attend more selective schools.
[It's also possible that attending the right school gives access to networks and valuable information about career paths; see here.]
Given that annual U.S. higher education expenditures are over $460 billion, but per-student expenditures increase dramatically with college selectivity, understanding why students who attend selective colleges earn more over their lifetimes has dramatic implications for how those dollars are optimally allocated. Recent theoretical work seeking to explain why students increasingly sort by ability across college selectivities suggests a positive complementarity in human capital acquisition between students' ability and the greater resources available at selective colleges, but these models have received little empirical attention. On the other hand, the relatively few studies that have attempted to measure student learning in college have found little di fference across di fferent types of colleges once pre-college characteristics are controlled for (Pascarella and Terenzini 2005; Arum and Roksa 2011). While it is not clear whether the "learning" measured in these studies is of the type that fi rms would care about, this evidence suggests that the return to selectivity is unlikely to be due to human capital alone and that the signaling mechanism is worth a more careful investigation.