Bryan Caplan on College, Signaling and Human Capital

Thursday, April 10th, 2014

Russ Roberts interviews Bryan Caplan on College, Signaling and Human Capital:

Bryan Caplan: So, in terms of the research, one very well-established fact that gets very little play is what’s called the ‘Sheepskin Effect’. So, we’ve sort of been touching on this point on how not finishing, starting college without finishing seems to raise earnings by only 10%, whereas it raises earnings by, seems to raise earnings by 83% if you do finish. So, this is actually part of a much more general fact, which is that a lot of the payoff for education comes from getting your degree. It comes from crossing the finish line. Right now, in the early decades of the signaling model, this fact was not well-established. And so there was a lively debate: Is there a sheepskin effect? Is there not a sheepskin effect? But until the sheepskin effect was well-established, when it was still in debate, almost everyone took for granted that a large sheepskin effect would show that signaling was important. Because otherwise, why would it be so important to just get over that finish line? So, in terms of the human capital model, it’s really puzzling. What is it, the last class that teaches you —

Russ Roberts: The capstone. It’s the capstone class. The whole idea.

Bryan Caplan: Yeah, the capstone class. So, like, why is it the person one [?] class short of graduation is only getting 10%, whereas if you finish that class you would get 83%?

Russ Roberts: Well, hang on. Two things. First of all, for those who are — I don’t know if this is a universally understood name, but a ‘sheepskin’ is another word for graduating college. ‘Getting your sheepskin.’ I don’t know the origin of that. Do you know it, Bryan?

Bryan Caplan: Yes. Yes, I do. So, it’s another word for ‘diploma.’ And the reason is diplomas used to be written on sheepskins, actually.

Russ Roberts: Oh, which is called, like, is it vellum? What’s it — there’s a name for sheepskin. What’s another name?

Bryan Caplan: Yeah, that sounds right.

Russ Roberts: I’m not sure that’s right. But I see what you are saying. It’s a form of ancient paper-like stuff. Um, so —

Bryan Caplan: Yes. So, anyway —

Russ Roberts: Hang on. My question is: Is 10% — you said the return is 10% if you don’t finish. Is it 10% if you go for —

Bryan Caplan: Yeah, the premium.

Russ Roberts: The premium. Sorry. The premium over high school students is over 10% if you don’t graduate. That is, attending college makes you a little more money relative to a high school graduate. Is that true if you go for one year, two years, three years? What you are claiming is, you might be claiming — if you go for 3 and a half semesters and you are 1 course short of graduation, you still only get 10%? Is that true?

Bryan Caplan: It’s a little more complicated than that. So, if you go and take a very close look at the data for college, you’ll see something like for the first year of college, that might increase, if you [?] essentially finish that, that might increase your earnings by 5-10%. Then year 2, maybe another 5-10%. Year 3 seems to give you nothing. And then it’s year 4 that gives you the remainder. Which is huge.

Russ Roberts: I guess the question would be —

Bryan Caplan: And we see that’s very similar for high school as well. So, like, 9th grade seems to give you a bit, 10th grade a bit; 11th grade seems to give you nothing at all; and then 12th grade, finishing that, getting a diploma, that’s what gives you a very big raise over what a high school dropout would earn.

Russ Roberts: Yeah. I guess the complication is that the people who do get, say, three and a half years into their college degree or one course short, why don’t they finish? And what does that tell you.

Bryan Caplan: [?] Exactly. Now you’re thinking like someone who believes in signaling. Now you’re saying, [?] asking, why didn’t this person finish? What is wrong with that person? Maybe they just had some bad luck. But also it suggests, look, in our society it’s expected that you finish; you [?] finished; there are a lot of different ways that you could have made up whatever problems that you had; so I’m nervous about you as an applicant. But let me go back to how the debate played out. So there was a long period when economists just weren’t sure if there was a sheepskin effect or how big it was. During that period everyone took for granted that a large sheepskin effect would show that signaling was important and the lack of one would at least undermine that. Now, in the late 1980s, early 1990s, it became totally clear that there were huge sheepskin effects — better data came along and several papers were published and they’ve never been challenged successfully. Not even challenged successfully — no one’s even tried to challenge them. The data are now so clear. But almost as soon as the evidence came in very strongly that sheepskin effects were very real and very large —

Russ Roberts: Let me guess —

Bryan Caplan: Then labor economists moved the goal posts and said, Well, that doesn’t really prove anything.

Russ Roberts: Of course not.

Bryan Caplan: And then they came up with some very sophisticated mathematical models where it wouldn’t have to prove anything. So, yes, well, you can come up with a model where it doesn’t prove anything, but that doesn’t mean that it doesn’t. In order to show that it — basically, in order to say that it doesn’t mean anything, you have to say, well, there’s got to be some totally unmeasurable difference between the people who just finish and the people who just don’t, and I can’t tell you what that thing is; and none of the things we actually measure worked; but that’s my story. Right? And when you know that these people making these arguments have been through the entire educational process; they finished at least three different degrees. To be a researcher on this, you finished your high school degree, you finished your bachelor’s degree, your master’s, probably your Ph.D. And for people like that to say, I’m totally unconvinced that it matters whether you actually get your degree and cross the finish line, to me it’s just insane. Like, you know very well, you were a student, you know that if you didn’t finish that would ruin your life and prevent you from getting this job. You know that. Everyone around you knew that. If you were to go and deny that to your fellow students and say, I’m not showing up for the final exam because what difference does it make? It makes a lot of difference. And it makes a lot of difference because people who don’t finish are quite different from people who do, and employers will hold it against you.

Russ Roberts: Yeah, it’s fascinating. Any other empirical evidence you want to cite that’s relevant besides the sheepskin effect?

Bryan Caplan: Sure. Well, so there is some abstruse research evidence that I could go over, but actually I’d rather focus on some arguments that — in a way I think there should be research on them although in a way they are too simple and clear to get a paper out of it. Like, here is one fact that I’ve often noticed. What do students do when a professor cancels class? They are happy. They cheer. And from a human capital point of view this is bizarre. Basically, the rest are saying, you know how you [?] for me to train me to be a better worker so you can do better in real life? Yeah. Well, I’m going to keep your money and I’m not going to give you the training. See ya’. That is effectively what the human capital model is saying is happening when a professor cancels class. On the other hand, so the signaling model says, well why don’t the why are the students happy? Because the employers will never know that you canceled class. What they are learning they are probably going to never need to know again. It’s not going to show up on their transcripts. If everybody learns less then this is not going to change the distribution of grades in all likelihood. So then students get an extra afternoon off and then it’s not going to affect their future. So, this is something that my 11-year-old sons who are fanatical about doing their homework, yet they are delighted with every snow day, say, why are you delighted? Well, it doesn’t disadvantage us compared to anyone else. Aren’t you worried you are going to need to know the stuff you didn’t learn? Even 11-year-olds, they’re cynical enough to go, yeah, right, like that’s ever going to happen. Kid, you appear deeply in the system and [?]

Russ Roberts: I fight off the urge to say, Well, Bryan, in your classes they cheer, but in my classes they weep. But I’m going to leave that out. I’m not going to say that. That would be cruel.

Bryan Caplan: Or here’s another one of my favorite debating points. Claim: Right now you can get the best education in the world for free if you want it. What am I talking about? Well, suppose you think Princeton is the best education in the world. You don’t need to apply; you don’t need to get admitted. All you do is move to Princeton and start attending classes. And in my experience, no one will stop you; no one will card you. If you go to the professor and say, I’m not a student here but I’m interested in your class, most professors get a tear in their eye: Someone actually wants to learn from me. But if you go and get this totally free Princeton education for four years, there is one thing you won’t have at the end: any proof you ever did it. Right. And if you consider — Deal A is you go to Princeton and you get a Princeton education with no record you ever did it, or you go to a much lower-ranked school where you admit you are getting a worse education but there is a record, which one is going to do more for your career? Almost everyone says, well, obviously the second one. The first one may make you an interesting person, may be a great experience, but employers aren’t going to care. They won’t believe you if there is no sign you were ever there. Whereas getting a bachelor’s degree by the book from Podunk State on the other hand, that actually, that gives you — it doesn’t give you nearly as much as getting a bachelor’s degree from Princeton but it gives you something that is real and tangible.


  1. Bob Sykes says:

    Back in the early 1970s, someone surveyed civil engineering company managers regarding what they wanted in a new hire. The managers said they wanted someone with a BS degree from an ABET-accredited college. (ABET is the engineering accreditation org.) They did not care what school (MIT = Akron), what degree (civil = mechanical = electrical = chemical, et al) or really what GPA (some bias against straight A). They stated they would themselves teach the new hire what they wanted them to know. (Silicon Valley does not get professional ethics.)

    It turns out they were using the BS as an indicator of basic intelligence and willingness to work and achieve a goal. And that’s what’s going on here with regard to sheepskins: the employers are using it as an intelligence or psychological test. They don’t care about the last course or really any course.

    PS: Parchment is animal skin prepared for use in writing; vellum is specifically lamb skin, which provides a superior surface to parchment. Both produce very durable writing surfaces, much more durable than paper or modern electromagnetic and optical media, but not as good as burnt clay.

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