The GMU/UVa wage disparity and the signalling model of education

It’s a well-known fact — well-known around GMU that is — that GMU graduates earn higher average salaries than do UVA grads (direct link here), that is for four year undergrads in their first year of employment.

It’s not just that UVa is in decline, or that some of them end up richer later in life.  Or others may use their wealthier parents to live in Williamsburg, Brooklyn and avoid direct employment.  A major reason for the wage discrepancy is simply that a disproportionate chunk of GMU students are likely to get jobs in the relatively high-paying Washington, D.C. area.

OK, so how does this relate to the broader ongoing debate over the signaling theory of education and wages?

It is widely accepted that UVa is a more exclusive school than GMU by the usual standards.  Yet here we see labor markets “seeing through” those credentials, and paying more to the GMU graduates.  In other words, labor markets are seeing that GMU students are, on average, “less exclusive by origin but will have a higher marginal product very quickly.”

The signaling model, in its simplest, most stripped down form, assumes that employers cannot judge the marginal products of individual new hires but instead pay them according to their credentials.  Yet here we have a case where employers seem quite willing to make a judgment about marginal product and indeed that is a judgment which contradicts data on exclusivity of academic origins.  Once you postulate that employers are willing to make estimates of individual marginal products which differ from the rankings that might be given by “raw ability,” the signaling model is  less applicable.  I don’t want to claim that the wages converge exactly on marginal products, but the credentials clearly are just one factor of many.  Employer judgments of expected marginal products are not dominated by credentials, and you can imagine that after having a worker for a year or two the credentials are even less important as a means of judging prospective marginal product.

Another way to put this point is that the speed of employer learning is in fact fairly rapid, and some of it happens before the job even starts.


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