The Signaling Theory of Higher Education

“Why do I go to school?” is often answered by a teacher or a parent saying “So you can learn and build the skills you need to get a good job in the future.” Parents, teachers, students, and broader society justify college by saying that the job market is competitive. If a student wants to succeed in work, they also need to succeed in school. The better grades a student gets, the more prepared they are for school — according to teachers and parents. Yet even as children become cognizant of this fact, they find it difficult to internalize this fact — they can’t tell themselves that employment success is measured by academic success. Perhaps these students are on to something.

Education, contrary to what many people believe, is not just about skills acquisition. The labor market rewards people on the basis of their degrees and good credentials, not that they studied history and music in school. While school does teach some fundamental skills — reading, writing, math, et cetera — most subjects taught are of no relevance for children. But why does the labor market value people who go to school? The reason is because going to school sends signals to the market that a student has accomplished something. Success in school tells an employer a student is willing to conform, is able to do work of a high quality, even if it is irrelevant, among other things.

Education is about signals, not knowledge

Therefore, participating in the system has become more valuable than the knowledge that is actually conferred by schools. Here’s an example: let’s say you want to attend Harvard. You do not really need to pay tuition, get accepted, or go through any formal process. You can just show up and listen to a lecture. Most professors would not ask you to leave because there are likely dozens or hundreds of students in your class, and it would take too much time and effort for the professor to ask you to leave and ensure you have left. Indeed, a student who decides to turn up may even make a professor feel happier — their course is so valuable more people are willing to show up. But almost nobody tries this path, even if it would save them thousands or tens of thousands of dollars. Why? Because if you were to sit in on classes, you would still not earn a credential. You could even do every homework assignment a professor sent their students, but you would still not earn a credential.

This shows employers are really interested in degrees, not the specific knowledge you acquired. Rarely will an employer ask you to recall what you learned in your history or politics degrees — unless you are working in those fields, then your degree will be less useful. Most research concludes that the real value of education comes from graduation, not merely attending. The last year of high school is more valuable than the first three; the last year of college is worth many times more than the prior three years. If an employer is paying for knowledge, this doesn’t make any sense — students will learn about the same in each year. What is so special about the graduation year, then? Well, during that year you earn a credential — something that sends signals to an employer. If you dropped out in your third year, you would not have earned that credential, neither the signals that accompany the degree.

The same line of reasoning applies to the person who failed a class versus the person who forgot everything. If you fail a class, many employers will discard your application — you have demonstrated that you are not able to meet certain academic standards. This is a powerful, negative signal. If you pass, employers will not care that you have forgotten most of what you learned. The point is that you passed, which meant you had to have worked hard, and spent a lot of time engaged with the course material. If we are to believe that school is a place to acquire knowledge, then this line of argument does not make sense. Students should not be rewarded for forgetting knowledge any more than students should not be rewarded for failing to acquire said knowledge. But there is a difference.

We can only reason with this logic if we give into the theory that education is about signals. Attending college shows employers that you have certain character traits and are able to follow strict guidelines in your work. The people who don’t get there are given a negative signal because they have not conformed with society’s norms.

The convenience of credentials for employers

Why do employers care so much about credentials? The main reason is that there is no good way for an employer to judge how good a person is until they hire you, but businesses can only hire a few people. If they have someone with a degree, they know off-the-bat that the student has certain characteristics — or at least had them when they were studying. If they are evaluating someone without a degree, they don’t know anything about them. Perhaps the only thing they may think is to ask why the individual did not get a degree in the first place. Because it is so difficult for employers to judge applicants, they have to rely on credentials to do the work for them. But this means that credentials are merely a filter for applicants, rather than something that adds a lot of value to students in the workplace.

Another reason employers care so much about credentials is because more people have them. In the past, many people did not even graduate high school, never mind college. But over the last few decades, college attendance has surged, as more people go to college in pursuit of a degree; a form of credentialing that usually allows someone to access higher earnings and better job prospects. This has meant there has been a flood of new credentials in the market — so much so, economists have a phrase for it: credential inflation. Indeed, it may not take any more work to be a junior salesperson than forty years ago — the core skills are the same. But because there are more people with degrees out there, an employer is more likely to hire someone with a degree. When degrees were rarer, they had a very strong signal attached and would allow people to get more advanced jobs. But as degrees have become more common, the signal of a degree has become weaker, meaning the types of jobs people can access are usually of a lower social standing.

As more people attend college, the value of each individual degree depreciates — albeit by a small amount. Therefore, more people are going to graduate school and pursuing other education, because doing so allows them to send a stronger signal to the labor market. A student with a PhD sends a stronger signal than someone with a bachelor’s degree — they have been in the system longer and have had to conform for many more years than the bachelor’s degree holder.

The education industry does not make sense. But it makes even less sense if you don’t recognize the power of signaling. Students study irrelevant subjects for years, with the understanding that most of what they learn will not be useful to them after they graduate. And yet they are rewarded by the labor market because they have been able to survive the system and graduate successfully. The truth is that, from an economic perspective, a college degree is still worth it in most cases. The value of a degree depends on the major — a history major is usually less valuable than a computer science major because there are only a few thousand historians in the U.S., and a few hundred thousand open job applications for CS graduates — but there is still some value of getting one. This arcane system would drive any student crazy. The main rule students need to know is if they get good grades and graduate, they should find it easier to get a good job.

Signaling is not just about good signals

The signaling theory also describes why those who pursue unconventional paths are less likely to succeed than those who comply with academia’s standards. In essence, if you pursue a contrarian path, you are sending a counter-signal to the labor market. Let’s say you start a business when you are young. Sure, this signals to someone you have a strong work ethic. But it also signals you were unable to comply with the norms set forth in traditional education. And so the value of your starting a business will be seen differently by employers. Some will see it as the best thing you could have done — and will in return hire you — and others will see it as an irrational decision, and decide to deny your application because you send a poor signal.

Credential inflation has made it almost impossible for people to escape the claws of education — there are more people with degrees, so your case for why you didn’t get a degree weakens. It would take millions of people at once who decided not to attend higher education for anything to change, and there are no signs of that happening any time soon — although things could change as people lose trust and faith in our educational institutions.

Why does all of this matter? The obvious answer is because it shows the common response to “Why are we at school?” is wrong. It has almost nothing to do with learning the skills you need to get a good job. Most of school is about attaining credentials, which send employers a strong signal about your abilities. The other answer is because signaling exposes something we want to ignore in education: education is a race to get the most credentials, rather than the pursuit of higher knowledge. In the past, academia was all about learning new skills and acquiring knowledge; now, education is about getting credentials. As more people attend college, the case for going to college becomes stronger, albeit ridiculous — you have to go to college because so many people are, and you are competing to send the best signals. This explains why college has become America’s national religion: students need to believe in the value of college and follow its rules in order to get better jobs.

Blog, EssayJames GallagherComment