Higher Education as Signaling Quality
Suppose there is a labor market with productive workers and not productive workers. The workers, sellers of their own labor, know if they’re productive or not because there’s information asymmetry. The worker’s potential employers, who are buying this labor, would rather hire productive workers. Higher education has a two-fold benefit: it can improve the workers’ productivities and it signals that the worker that the worker is more likely to be a productive worker. Information asymmetry is reduced the most when the cost for not productive workers to get an education is too high so that only productive workers have the quality signal of having attained higher education.
A potential employer might look at a degree and know that the degree-holder is at least hardworking enough to get through four years of university. However, the cost for getting a degree in the real world doesn’t have a fixed cost for everyone. Everyone’s circumstances (financial and otherwise) is different and the opportunity cost from four years of time is great. The cost for getting higher education isn’t always lower for productive workers. A productive worker might have family obligations and this cost of not being able to take care of family members could be arguably greater than the cost of another unproductive worker who doesn’t have family obligations.
In another case, the ability of education to signal quality decreases if all workers attain education. (For example, if the government gives grants to all workers to go to university). Workers can become overeducated and the signal becomes less meaningful. In the case of over-education, workers might downplay their education in order to get hired at all. This increase in higher education attainment is happening, right now, due to changing societal norms regarding higher education, globalization, government subsidization of higher education, and other factors. This situation is bad for the workers (sellers), because now they need other ways of signaling to employers (buyers) that they’re productive. This might manifest into these productive workers taking on more education (graduate degrees, etc.) than they would have had in a scenario where only productive workers had education. Fortunately, there are still other quality signals in labor markets like interviews and resumes of previous work experience.
Links:
http://pearsonblueskies.com/2014/the-signalling-mechanism/#fn-1755-5
http://www.economist.com/blogs/freeexchange/2011/01/education_0