Assumptions and CaveatsBack to table of contents
Consistent with past research,10 we interpret wage gains from completing a degree as primarily reflecting productivity differences. This is a necessary step in order for the effect on wages to translate into impacts in the wider economy. However, it is important to consider a few caveats to this analysis.
Although the regression models include occupational controls, it is possible that some of the wage effects may not represent actual productivity gains. For example, some of the gains to receiving a degree likely represent what is known as “signaling.” In this case, the degree does not increase a worker’s productivity, but rather informs potential employers of underlying innate ability levels that enabled job candidates to complete the degree. If the higher earnings college graduates receive are largely due to signaling, one concern is that increasing the number of degrees might not increase aggregate productivity in the economy, but merely allow those with degrees to take better-paying jobs that would otherwise have gone to workers without those degrees. This would make the social returns to education lower than the private returns.
The concern over signaling is mitigated for several reasons. First, while the debate is certainly not settled, the literature generally concludes that there is “little convincing evidence for an important role of Job Market Signaling.”11 Second, even pure signaling can actually lead to higher productivity by allowing better matching of employees to employers. Consider, for example, a hypothetical situation in which every job applicant is banned from disclosing any information on education and past work experience. Employers would have a much harder time finding the workers who best fit job requirements, and overall productivity would suffer. In this case, the signaling value of education and work experience information has a significant impact on productivity. In other words, signaling boosts productivity by helping to match the most-able workers to the job.
In addition, if employers use the bachelor’s degree signal as a minimum qualification for many positions, then more-educated workers do not crowd out less-educated workers even if the effect of the degree is purely signaling. In this case, a worker with a college degree gets a higher-productivity job that neither that worker nor a less-skilled worker previously could have taken. For example, while an MD degree may signal underlying ability, nobody is allowed to practice surgery without one. As a result, increasing the supply of medical doctors does not crowd out any less-credentialed workers and increases total productivity even in the implausible case in which the degree is pure signaling of prior ability.
Overall, we take the approach of past researchers and interpret the wage gains as productivity gains. We mitigate this somewhat by including occupational controls in some models. Although this measure is imperfect and likely includes some wage gains that do not translate into productivity, there are also spillovers from greater education that we leave out, including innovation and complementarities with lower-skilled workers. For example, Enrico Moretti estimates that a 1 percent increase in the share of college-educated workers in a city increases the wages of high school dropouts by 2.2 percent and high school graduates by 1.3 percent.12 The approach of interpreting wage gains from education as productivity gains balances the risks of underestimating and overestimating the gains.
10. Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh, Productivity, Volume 3: Information Technology and the American Growth Resurgence (Cambridge, Mass.: MIT Press, 2005); Canyon Bosler, Mary C. Daly, John G. Fernald, and Bart Hobijn, “The Outlook for U.S. Labor-Quality Growth,” National Bureau of Economic Research working paper no. w22555 (2016); Goldin and Katz, The Race Between Education and Technology.
11. Fabian Lange and Robert Topel, “The Social Value of Education and Human Capital,” Handbook of the Economics of Education 1 (2006): 459–509.
12. Enrico Moretti, “Social Returns to Education and Human Capital Externalities: Evidence from Cities,” Center for Labor Economics, University of California, Berkeley, 1998.