How much of education is signaling? — yet again

The social and the private returns to education differ when education can increase productivity and also be used to signal productivity. We show how instrumental variables can be used to separately identify and estimate the social and private returns to education within the employer learning framework of Farber and Gibbons (1996) and Altonji and Pierret (2001). What an instrumental variable identifies depends crucially on whether the instrument is hidden from or observed by the employers. If the instrument is hidden, it identifies the private returns to education, but if the instrument is observed by employers, it identifies the social returns to education. Interestingly, however, among experienced workers the instrument identifies the social returns to education, regardless of whether or not it is hidden. We operationalize this approach using local variation in compulsory schooling laws across multiple cohorts in Norway. Our preferred estimates indicate that the social return to an additional year of education is 5%, and the private internal rate of return, aggregating the returns over the life-cycle, is 7.2%. Thus, 70% of the private returns to education can be attributed to education raising productivity and 30% to education signaling workers’ ability.

That is from a new NBER Working Paper by Gaurab Aryal, Manudeep Bhuller, and Fabian Lange.  You can enter “education signaling” into the MR search function for much more on this ongoing debate.

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"70% of the private returns to education can be attributed to education raising productivity"

Wow. Just wow. All the "cultural Marxism" and "victimhood studies" students are "indoctrinated" into is turning them into useful citizens.

Have I got this right? Their measure of education is a compulsory extra year at secondary school?

Well, I suppose you have to start somewhere.

@dearime - yes, I'm skeptical. I don't know what they mean by "70%" in that for many jobs, it's 100% required you have a degree before you're even hired. Beware of papers like this.

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so postmodern marxist indoctrination turns students into
"useful citizens" sounds mebbe a little Orwellian
useful to whom and for what exactly!

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What method could they have possibly used to figure this out, that couldn't give the opposite result by tweaking a few parameters?

Going forward I will be posting this comment on all discussion of economics papers, as a public service.

They used the method of instrumental variables as explained in sentences 2, 3, 4, and 5. If you don't know what that is and from your question it is not clear that you even read the blurb, you would not only do a public service but a service to yourself to better acquaint yourself with this tool used in econometrics and statistics here:

https://en.wikipedia.org/wiki/Instrumental_variables_estimation

I don't need to know the exact method to know that, if a result was obtained with econometrics, then it is hopelessly confounded. (Unless the study is effectively an RCT — but then the result wouldn't require econometrics, just counting.)

Look at the example on your Wikipedia page, for God's sake. They claim that:

"The tax rate for tobacco products is a reasonable choice for an instrument because the researcher assumes that it can only be correlated with health through its effect on smoking."

I mean, this is insane. Completely ignoring the fact that skinny liberals are more likely to pass tobacco taxes — among many, many other possible confounders.

IV almost always suffers from this problem, because in the real world, everything is correlated with everything else.

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Is the idea that "social return" consists only of the increased productivity that might come from education which increases the student's human capital, while "private return" includes the benefit to the student of being assigned to a more productive job, regardless of whether they would have performed equally, better, or worse in that job had they not bothered with education?

...might there be any social return to a pure signaling model, by correctly allocating high-productivity people to the jobs that need them? Wouldn't overall production still be higher that way?

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Silly me. I thought the purpose of education (mainly government-sponsored child abuse) was to brainwash/indoctrinate the serfs.

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@dicbtb

"A general state education is a mere contrivance for moulding people to be exactly like one another; and the mould in which it casts them is that which pleases the predominant power in the government, whether this be a monarch, a priesthood, an aristocracy, or the majority of the existing generation. In proportion as it is efficient, it establishes a despotism over the mind, leading by natural tendency to one over the body."

-- John Stuart Mill

I not infrequently wish, as I read Marginal Revolution, that a statistics class had been a component of the moulding.

Though in this case, I am not entirely sure it would be sufficient.

"What an instrumental variable identifies depends crucially on whether the instrument is hidden from or observed by the employers. If the instrument is hidden, it identifies the private returns to education, but if the instrument is observed by employers, it identifies the social returns to education."

Is the significance that employers don't know whether the extra year of school was compulsory?

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Why wonder how much of "education" is signaling?

Why not wonder instead: how much of "education" is networking?

Signaling and networking are joined at the hip so study of one will cast a huge spotlight on the other.

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looks like the answer to the question of how
much of education is "sociology signaling" is
-non stem fields es muy importante
- stem fields not so much

l

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I can't read the full paper, but my first thought was that 'education' is a horribly broad category, and surely the signalling return must vary greatly by the prestige of the college, or no one would spend the money to go to Harvard or Yale.

I'm willing to bet that the ratio of useful knowledge to signalling is very different in chemical engineering vs gender studies or psychology. Law is notoriously bimodal when you look at the salaries of Ivy League graduates vs others.

In short, if the paper doesn't distinguish between schools and faculties of study, I would be wary of the results.

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