This puzzle is related to (and much simpler than IMO) the bigger puzzle of employment generally. What is the fundamental economic reason that a person accepts a fixed amount per hour or per year, and that an employer agrees to pay regardless of outcome. Why don’t we see a lot more piecework and medium-term contracts?
There are a few reasons the education racket is a stable(-ish) equilibrium:
1) Employers don’t individually pay for the signaling. Finding a cheaper signal helps those candidates who can spend less on school, but doesn’t much help the employer who uses it.
2) Finding a more accurate signal benefits employers, but it doesn’t remove the utility of education as a signal, it just augment it. In fact, MOST employers layer lots of other signals on top of education.
3) Most employers are products of education systems, and believe in the skills/knowledge theory more than they recognize the signaling theory.
4) The conformity requirement cuts both ways. Smart people who’ll make good employees have to show they’re able to act in accordance with expectations. And once that’s baked in, they’re likely to choose employers who don’t challenge them on those dimensions. So it’s a huge risk for an employer to defect from this selection mechanism.
I agree that this is a larger and more complex puzzle, which is in fact why I avoided addressing it in my post. That said, I want to address some of your points, with which I mostly agree, individually.
Regarding 1), this is true but, all else equal, you’d think that employers would still have incentives to find cheaper or quicker work-arounds for extracting the same signal (see my discussion of Google hiring directly out of high school in the post). I suspect they don’t because of the other reasons you mention in your comment.
I agree that 3) and 4) play large roles that are hard to model in economics studies. While I haven’t read it, I wonder if Tyler Cowen’s “The Complacent Class” discusses this.
This puzzle is related to (and much simpler than IMO) the bigger puzzle of employment generally. What is the fundamental economic reason that a person accepts a fixed amount per hour or per year, and that an employer agrees to pay regardless of outcome. Why don’t we see a lot more piecework and medium-term contracts?
There are a few reasons the education racket is a stable(-ish) equilibrium:
1) Employers don’t individually pay for the signaling. Finding a cheaper signal helps those candidates who can spend less on school, but doesn’t much help the employer who uses it.
2) Finding a more accurate signal benefits employers, but it doesn’t remove the utility of education as a signal, it just augment it. In fact, MOST employers layer lots of other signals on top of education.
3) Most employers are products of education systems, and believe in the skills/knowledge theory more than they recognize the signaling theory.
4) The conformity requirement cuts both ways. Smart people who’ll make good employees have to show they’re able to act in accordance with expectations. And once that’s baked in, they’re likely to choose employers who don’t challenge them on those dimensions. So it’s a huge risk for an employer to defect from this selection mechanism.
I agree that this is a larger and more complex puzzle, which is in fact why I avoided addressing it in my post. That said, I want to address some of your points, with which I mostly agree, individually.
Regarding 1), this is true but, all else equal, you’d think that employers would still have incentives to find cheaper or quicker work-arounds for extracting the same signal (see my discussion of Google hiring directly out of high school in the post). I suspect they don’t because of the other reasons you mention in your comment.
I agree that 3) and 4) play large roles that are hard to model in economics studies. While I haven’t read it, I wonder if Tyler Cowen’s “The Complacent Class” discusses this.