Education: Is It Just Signaling?

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Around this time every year, one begins to notice a marked shift in the demeanor of students everywhere. Following a grueling period of studying and exams, we emerge from our rooms, battle-scarred yet relieved. Summer, once hopelessly distant, is now nearly within our grasp. 

Some of what we have learnt and, by now, no doubt forgotten, may seem just a bit impractical. It is true that outside very specific career paths, it is supremely unlikely many of us will have to identify the production quantity at which a natural monopoly achieves allocative efficiency. (It’s where price is equal to marginal cost, for anyone wondering!) 

Why, then, do we work so hard to learn material we may never use again? There is, of course, a deep satisfaction that comes with learning. Yet apart from that, there is also a fundamental economic concept at play.  

Whether consciously or not, all of us taking APs, IBs, DSEs, or another one of the alphabet soup of tests, are involved in what economists call signaling. 

A “signal,” in the economic sense, is credible information that one party transfers, about itself, to another. The concept of signaling was developed by Nobel Prize-winning economist Michael Spence, who formulated a model for signaling in the job market. 

Spence noted that there exists asymmetric information in the labor market. In other words, prospective employers do not have perfect information about job applicants. Faced with a lineup of nearly identical individuals, it is impossible for an employer to determine who possesses the greatest ability.  

This is where signaling comes in. A job applicant can convey a piece of relevant information, a signal, to the prospective employer to demonstrate ability. Education is one such signal. For the signal to be effective, the employer must be able to establish that there is a strong correlation between high levels of education and high levels of ability in the workplace. 

The key in this model is that the education attained does not need to have any practical value in the job. Instead, the mere fact that one has achieved a certain standard of education is enough. Those who are of low general ability will be much less likely to have procured a particular degree than those of high general ability. 

It is obvious that a computer science degree is a reliable signal that one can perform well in a computer-related career. What is more interesting about signaling, is that even having a degree in an unrelated subject can be an effective signal as it communicates a certain standard of performance. 

As we take exam after exam and involve ourselves in a variety of extracurricular activities,  we too are signaling. In our case, most of us are interested in signaling to colleges that we have the tenacity, intellectual ability, and curiosity, among other traits, that are required to succeed. 

We impose a cost on ourselves by subjecting our minds to arduous study of calculus, history, chemistry—you name it. The fact that we are usually able to handle this cost and be successful in our exams is a testament to our general work ethic and academic ability. The specifics of what we learn matter slightly less.

It is worth noting, however, that in today’s ever more competitive world, the costs of signaling are rising. For example, no longer does an ordinary bachelor’s degree serve as an effective signal of competence. With tertiary education becoming incredibly common, the presence of an undergraduate degree is conveying less and less useful information to employers. 

Nevertheless, the next time you find yourself struggling through difficult but seemingly “pointless” work, do rest assured—your efforts will not go unrecognized. 

A version of this article also appeared in the South China Morning Post's Young Post on Thursday, May 19. http://yp.scmp.com/news/features/article/103489/dses-economics-signal-employers-youre-hireable