Labor Economists versus Signaling

Signaling has been one of economists’ more successful intellectual exports. After Spence and Arrow developed the signaling model of education in the 1970s, the idea soon spread to sociology, psychology, and education research. 97 While few experts are staunch converts, most grant the idea is plausible and the evidence ifvod tv.

Yet strangely, one body of experts sees little or no merit in the signaling model: labor economists, particularly education specialists. 98 In applied labor economics, human capital theory now reigns supreme. Most scholars see signaling as an irrelevant distraction. Very few would endorse anything approaching a 20/80 split in signaling’s favor.

A high-profile chapter in the Handbook of the Economics of Education fairly represents labor economists’ consensus: “Our review of the available empirical evidence on Job Market Signaling leads us to conclude that there is little in the data that supports Job Market Signaling as an explanation for the observed returns to education.” 99 This is a disquieting intellectual development. Economists have plenty of blind spots, but they spend years studying economic theory.

You would expect labor economists to have a crisp grasp of the signaling model. Yet after forty years of research, the most qualified experts turn out to be the least persuaded. If I denied I was disturbed by labor economists’ disdain, I’d be lying. If they’re right, I’m wrong. Where precisely do I part company from mainstream labor economics?

For the most part, I accept their empirical evidence—especially when they rely on standard, transparent statistical methods. My complaint is that mainstream labor economists have an interpretive double standard. When their evidence supports the human capital model, they take the evidence at face value. When their evidence supports the signaling model, they wrack their brains to deny signaling an iota of credit.

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