Alex Eble and Feng Hu look at demand for schooling, returns to schooling, and the role of credentials:
Wages are positively correlated with years of schooling. This correlation is largely driven by two mechanisms: signaling and skill acquisition. We exploit a policy change in China to evaluate their relative importance. The policy, rolled out from 1980 to 2005, extended primary school by one year. Affected individuals must then complete more schooling to obtain their highest credential, the main signal of interest. If the primary mechanism behind schooling returns is signaling, we would expect little change in the distribution of credentials in the population, but a large increase in schooling. If skill acquisition dominates, we should see no change in length of schooling but a change in credentials. Our results are consistent with the signaling story. Further consistent with such a story, we estimate that the labor market return to another year of schooling is very small, though greater for the less-educated. We estimate that this policy, while redistributive, generates a likely net loss of at least tens of billions of dollars, reallocating nearly one trillion person-hours from the labor market to schooling with meager overall returns.
Given this, the expected increase in skills from the extra year is zero, so how can the authors of the study expect to distinguish between skills and signaling? I’m stumped. Probably that’s why I am not an economist.
The working standard of ceteris paribus among academic economists seems to be extraordinarily elastic. E.g., note how orthodox it is to describe the Great Depression as a macroeconomic phenomenon (i.e., centered on stuff like money illusion and wage stickiness and central banking and securities bubbles). Because all other things, notably policy at the microeconomic level, were effectively constant over that period, doncha know? Economists who don’t swallow that orthodox doctrine are less marginal than they used to be, but are still awfully marginal. And the orthodoxy is a remarkably extreme doctrine: an awful lot of microeconomic banana republicanism is blithely waved away.
(Surely it didn’t matter to … raise tariffs to 60ish percent, raise income taxes to 60ish percent, substantially blow off those aggravating war debts by fiatizing currency, nationalize gold at below-market prices, introduce new formal and informal means to hold wages high (totally having nothing to do with persistent unemployment attained levels comparable to those experienced in Europe over recent decades), cartelize agriculture and various industries, introduce new formal and informal policies giving employees and labor unions larger de facto ownership rights of employment roles, and generally ramp up regime uncertainty at all levels from Presidential rhetoric and court packing down through the aforementioned shocks in tax rates and currency stability and property rights and into retail discretionary favors of the new administrators and commissioners and so forth. E.g., if the political climate in Switzerland were to change tomorrow so that such microeconomic policy changes were popular, and then they were imposed starting in 2017 or so, no properly educated person would expect any serious impact on their economy, right? Only an economic illiterate holding retrograde 1840ish views on how economies work would naively think a seriously negative outcome from such changes was completely foreseeable.)
“Given this, the expected increase in skills from the extra year is zero, so how can the authors of the study expect to distinguish between skills and signaling?”
I don’t know how an unchanged curriculum equals no extra skills in your mind.
The point of the design is that if the credential is granted to kids who make it through fifth grade, and many of them then drop out and join the labor force, and you then decide arbitrarily to say that it’s only given after sixth grade, while leaving everything else the same, then there should be different consequences based on skills or signals.
If it’s all about signaling, then you would expect all the former 6th-grade dropouts to now be forced to waste another year in school to pass 6th grade and get the credential they wanted all along; they will spend an extra year in school, be no better off after joining the labor market, and suffer the loss of a productive year. If it’s all about skills, then the credential change would make no difference, and everyone dropping out after 5th grade would continue to drop out as they decide that they’ve invested enough in school skills for their particular circumstances, and that five grades of training sufficed, but six would be wasteful.
They observe that as the credential change rolled out, people stayed at school one year longer and also showed no salary gains, indicating the gain from schooling is almost entirely signaling, and so people were forced to stay longer to pass the arbitrary threshold, and that they were learning nothing useful in that additional marginal year.
Don’t they mention the fact that primary education (of whatever length it took to complete) had been compulsory during all the period covered by the study? It was the middle education that was made compulsory later and unevenly enforced.