Getting human capital sorted

Do returns to education reflect the productivity effects of enhanced human capital, or are they simply a signaling device? A new paper presented in London this week on The evaluation of European labour market programmes suggests that they are a combination of both. Here is the abstract from Sorting out the sorting vs. human capital debate (PDF) by Ulla Hämäläinen and Roope Uusitalo:

We use data from Finnish polytechnic reform to distinguish between human capital and signaling theories of the value of education. The polytechnic reform took place gradually over the 1990s eventually upgrading all vocational colleges to polytechnics. The reform extended the length of education and created a completely new set of degree titles distinguishing the polytechnic graduates from the earlier graduates from the same schools.

While both human capital and signaling theories predict that earnings are higher for those with higher level of education, their predictions differ in respect to what happens to those who graduate from schools that still are vocational colleges after polytechnics graduates start entering the labor market.

We find that the reform decreased the relative earnings of vocational college graduates as predicted by the signaling model. However we also reject the predictions of “pure signaling model and conclude that education has both human capital and signaling value. According to our best estimates approximately 56 percent of the return to education reflects the effect of education on productivity and the remaining 44 percent its signaling value.

Comments

[Don Lloyd]

It seems unlikely that a study involving vocational schools can be generalized successfully.

In the US, at least, vocational schools seem to sucessfully fill a need for students with second or third tier academic ability, but with above average drive and ambition.

A company considering the hire of a graduate is likely to have a pretty realistic idea of what it's getting.

It would seem that a vocational school is far more likely to add real educational value to its graduates as opposed to the added credential value that likely predominates the vast run of four year college graduates.

Regards, Don

[JoshNarins]

I know that what I'm about to say has nothing to do with economics, but I think it is important to discuss while "returns on education" are the topic.

Most OECD nations operate type of representative democracy, as it is now commonly called, a form of popular government.

It's obvious to me that there's a lot more at stake than educational assets being traded for income opportunities.