How much of Chinese education is about signaling?

Alex Eble and Feng Hu have a new and interesting paper (pdf) on this topic:

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, likely generates a 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.

In a nutshell, that’s lots of signaling.  Might the pointer there have been from Ben Southwood?  I am no longer sure.  Via Nathaniel Bechhofer, here is a recent study of education and earnings from U.S. data.


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