2011-11-24

Signal, Or Human Capital?


Bryan Caplan often blogs about his view that education is a signal of employability to employers, rather than an investment in human capital. What he means is that when we educate ourselves, we aren't amassing skill sets so much as we are demonstrating that we have all the right human qualities that employers want. I am sympathetic to this view point. Many other people disagree.
The more I think about this, however, the more ridiculous the "debate" about these two theories seems to be. Do any of us really think we live in a world where education is either an investment in human capital or an investment in market signalling?

It seems to me that education is clearly both. You could model it something like a classic Cobb-Douglas function: Y = [S^f] * [K^h]
Where:
  • Y = expected payoff of education
  • S = signalling returns
  • K = human capital returns
  • f and h = the extent to which each is important for a given course of study
Now obviously for people getting a certification in coding Javascript at a local vocational school f is nearly zero and h is very high.

For people enrolled at Harvard, f is extremely high and if h is greater than zero, well that's just gravy.

Clearly, every degree comes with some combination of market signalling and skills. An ideal education would be one for which f and h are both large positive numbers, but the reality of the situation is that for most of us with a generic business degree from a generic state college, our education consisted more of a dull signal than a large amount of human capital.

The question isn't "is education human capital or signalling," the question is, "for any given degree at any given university, to what extent is that an investment in a signal and to what extent is it an investment in human capital?"

The answer could vary between schools, degree programs, and potential employers. There's no reason to believe we have to choose between paradigms. They are not mutually exclusive.

Note: The majority of the above was posted as a comment to Bryan Caplan's most recent blog post regarding education.