Beneath the Sheepskin

One thing economists are good at is arguing about the causes and effects of a phenomenon. Some of them defined concrete theories used by governments and other stakeholders even till the day; others debate about correlations and causations in data and try to predict the future or the long-run. 

In all this hush, a recurring argument regarding the intrinsic value of a college degree arises. The traditional human capital approach favors a higher education level increases the productivity of the workforce, which seems rational. Education is an investment towards the building of more skilled labor, ends to means to a better future, and nonetheless a higher paying job. But does every school year necessarily increase wages and productivity? 

The answer to this, partly, lies in the data. A study (Hungerford and Solon, 1987) shows that the relationship between years of education and wages follows a discontinuous step-function when graphed. It is because there is a significant jump in earnings when one completes high-school or college and attains a degree, which is 12 or 16 years of education. But there is not much increase when one finishes 11 or 15 years of schooling. This phenomenon provides a clear picture of an existent Sheepskin Effect in returns to education. Ironically and historically, the graduate degrees were awarded on sheep’s skin, hence the name.

The other half of the answer lies in the inherent human nature. On introspection, what does a college degree provide to somebody? Literacy? No. Skills? Maybe, no. More enlightening education? Sure. None of this matters. A study shows that the Sheepskin Effect is much higher among high-school graduates than among college graduates. So, the jump in wage is more prominent when one attains a high-school diploma than a university degree. In such a case, at the margin, a person (probably, an economist) would choose to opt-out from college. 

Nevertheless, what does matter is a kind of assurance — a validation — that one is industry-ready, that one is specialized in his skill. This effect is generalized as signaling. Corporations find it convenient to hire graduates from reputed colleges rather than an equally-skilled, non-graduate worker. In other words, a college degree is a signal of a hard-working and productive worker. Besides this, as a finding asserts, graduates are more productive only because they stay longer with firms with low absenteeism rates. So, it is a win-win for hiring managers.

With this in perspective, another set of predicaments arise. For one, the signal differs from the subject one majored in. In the last decade, engineering was one of the highest-paid professions, then it was information technology; these days, it is marketing and finance. This suggests that an increase in skills do play a role, after all. The other side of the coin proposes that a major in arts undoubtedly earn more than a high-school graduate, even though his work is unrelated to what he studies in college. This is a result of signaling that causes the jumps in wages earned.

Interestingly, we cannot show a definite causal relation between wages and degrees attained, controlling for years of education. It means, for a fixed number of years of schooling, a graduate earns a higher pay than a non-graduate. It also means that if a person completed 15 years and 8 months of education, he is less capable of receiving a higher wage than a person who studies for a full 16 years, with a degree awarded. The reason behind this anomaly is the same as what has already been explained. It is the Sheepskin Effect at play. 

To put it in words, not obtaining a degree is not a lack of knowledge or productiveness, but a lack of validation. The cost of not attaining a degree is not being recognized by employers as a productive asset. Also, it is being underemployed, which further leads to inefficiency and hence, such results of weak causation. 

If each added year of education awarded a degree with it, the wages and productivity would have risen continuously. This, in economics, is referred to as the Credentialing or Screening Theory of Higher Education. For completing your credits acts as a screening mechanism among a large pool of job seekers. It safeguards employers from diminishing marginal productivity. Critics argue that, in fact, it acts as a safeguard to even the employees, enabling them to receive competent wage increments. 

Only if a screening mechanism could support this system of self-selection, why not take a standardized test in the first place? Evidently, university education does provide a sense of leadership, multi-tasking of professional and academic life, and creates hard-working graduates. Also, the age-old tradition of college and obsession with obtaining a degree at the end of the day is human. 

However, contradictory evidence of this lies in developing economies, where even education is a luxury. It is evident in labor-intensive industries, say construction. A productive construction site laborer does not need a college degree to work efficiently. An architect designing the premises, however, does need one. Consequently, it depends on the work you choose to do and is not a universal necessity until a certain level of development is attained. It is challenging for policymakers to cater to an enormous demographic, ensuring education for all — not as a sheepskin but as a fundamental right beneath it. 

Despite this all, I will go on to complete my college education, my graduation, just to send the signal of being ‘industry-ready.’