Some economists maintain that the returns to additional years of education are actually quite small but that there is a substantial "sheepskin" effect whereby one receives a higher salary with the successful completion of degrees or the earning of diplomas (i.e., sheepskins).
(a) Explain how the sheepskin effect is analogous to a signaling model.
(b) Typically in the United States, a high school diploma is earned after 12 years of schooling while a college degree is earned after 16 years of school. Graduate degrees are earned with between 2 and 6 years of post-college schooling. Redraw Figure 6-2 under the assumption that there are no returns to years of schooling but there are significant returns to receiving diplomas.
(c) Devise a difference-in-differences estimator (i.e., what data would you need and what would you do with the data) that would allow one to get at whether completing each year of school or completing degrees matters more when determining wages.