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THE ROLE OF EDUCATION SIGNALING IN EXPLAINING THE GROWTH OF THE COLLEGE WAGE PREMIUM

Published online by Cambridge University Press:  06 June 2017

Yu Zheng
Yu Zheng*
Affiliation:
City University of Hong Kong
*
Address correspondence to: Yu Zheng, Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Kowloon, Hong Kong; e-mail: yuzheng@um.cityu.edu.hk.
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Abstract

This paper incorporates an education signaling mechanism into a dynamic model of production and asks if “higher education as a signal” helps explain the simultaneous increase in the supply and price of skilled relative to unskilled labor in the United States since 1980. The key mechanism is that if college degrees serve as a signal of unobservable talent and talent is productive at the workplace, then improved access to college will enable a higher fraction of the population to signal talent by completing college, resulting in degrees being a better signal about talent and a widening skill premium. When I assess the contribution of signaling in the model calibrated to the US economy from 1980 to 2003, I find that about 10% of the increase in the skill premium can be attributed to the signaling mechanism, after adjusting for the potential decline in the quality of college graduates.

Keywords

College Wage PremiumEducation SignalingSkill-Biased Technical Change
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 3 , April 2019 , pp. 1247 - 1286
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

I thank Sumru Altug, Michele Boldrin, Ping Wang, an associate editor and two anonymous referees for their helpful comments. Financial support from the City University of Hong Kong Start-up Grant (No. 7200264) is gratefully acknowledged.

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