Employer Learning and the Signalling Value of Education

Abstract

If firms have limited information about productivity or the personal attributes that determine productivity (such as knowledge, aptitude, and motivation), they will have an incentive to ‘statistically discriminate’ among young workers on the basis of easily observable variables that are correlated with productivity, such as education.¹ By the same token, the signalling value of education is likely to be an important part of the return to education only to the extent that firms lack good information about the productivity of new workers and learn slowly over time. In this chapter, we provide some preliminary evidence on how much firms know about new workers and how quickly they learn over time and then use this information to address the issue of how much of the return to education could be due to signalling rather than to the direct effect of education on productivity.

This research was supported by the Institute for Policy Research, Northwestern University and by the Bureau of Labor Statistics, US Department of Labor. We owe a special debt to Nachum Sicherman for assisting us with the NLSY data. We also thank participants at the 33rd Biwako Conference on ‘Economic Adjustment, Incentives and the Internal Labour Market’ (Shiga, Japan, July 1995) for helpful comments. Errors and omissions are our own responsibility. Opinions stated in this chapter do not necessarily represent the official position or policy of the US Department of Labour.