THE ROLE OF EDUCATION SIGNALING IN EXPLAINING THE GROWTH OF THE COLLEGE WAGE PREMIUM

Abstract

This paper incorporates an education signaling mechanism into a dynamic model of production and asks if “higher education as a signal” helps explain the simultaneous increase in the supply and price of skilled relative to unskilled labor in the United States since 1980. The key mechanism is that if college degrees serve as a signal of unobservable talent and talent is productive at the workplace, then improved access to college will enable a higher fraction of the population to signal talent by completing college, resulting in degrees being a better signal about talent and a widening skill premium. When I assess the contribution of signaling in the model calibrated to the US economy from 1980 to 2003, I find that about 10% of the increase in the skill premium can be attributed to the signaling mechanism, after adjusting for the potential decline in the quality of college graduates.