The Power of The Education Signal
In economics, the Signalling Theory was first discovered by Michael Spence. Spence experimented and found a positive correlation between an agent’s (educational) credentials and a principal’s belief/judgment towards the agent’s capabilities. In simple words, someone with an (objectively) good educational background is seen as more capable to other parties than someone without (objectively) good education.
This correlation stems from the principles of Markets with Asymmetric Information. Markets characterized by asymmetric information refer to an environment where not all sellers and buyers receive the same information. There will be a party that knows some information that the other party does not know. This information imbalance between sellers and buyers can cause challenges in reliability, effort, and stability.
When referring to education signalling, the sellers are the employees and the buyers are the employers. In the job market, the sellers have more information than the buyers. The sellers know the type of educational background they received and the skillset they hold. However, the buyers only know what is being told to them by the sellers. Therefore, the sellers have more accurate information. Therefore, sellers with objectively higher educational backgrounds can raise the “prices” or values of their credentials for their prospective buyers than sellers without this educational background.
Overall, Spence found that even if education did not actually contribute anything to an employee’s productivity, it could still have value to both parties. If the appropriate costs and values are established, the market for education and hiring will be influenced by this information asymmetry. For example, employees with purchase more “good” education to raise their value in the job market. Employers will be willing to pay more for “good” employees with higher-quality education.
As a college student, this is fascinating. I often hear the phrase “you’re from Cornell, you don’t have to worry about finding a very good job”. This stems from our society’s belief that all you need to secure a “good” job is an objectively good educational background. However, this is becoming less fitting as employers are becoming more focused on well-rounded and diverse individuals.