We mentioned that “a [college] degree signals . . . something good about the job candidate, namely that they have enough intelligence, competence, and conscientiousness to earn a college degree.” This view, put forward by Nobel Laureate Michael Spence, is unsurprisingly known as the signaling theory of education. Taken to the extreme, signaling theorists say that you suffer through college not because you get valuable job skills, but only because it’s a good way to prove that you were already smart and capable before you started college.
a. Suppose you want to prove this theory wrong: You want to show that college courses really do make you a better worker, just like the human capital theorists say. How would you go about proving that? Remember, just showing that college graduates earn more isn’t evidence!
b. If that’s too difficult, at least explain why the following plausible-sounding tests of human capital vs. signaling aren’t very good tests at all:
i. Looking at wages of people with degrees compared with those of people without degrees
ii. Comparing wages for people whose parents can afford college with wages for people whose parents can’t afford college