Employer
Learning and the Signaling Value of Education
Joseph G. Altonji and Charles
R. Pierret
Abstract
If profit-maximizing firms have limited information about the general
productivity of new workers, they may choose to use easily observable
characteristics such as years of education to Òstatistically discriminateÓ
among workers. The pure credential value of education will depend
on how quickly firms learn. To obtain information on employer learning,
we work with a wage equation that contains both the interaction
between experience and a hard-to-observe variable that is positively
related to productivity, and the interaction between experience
and a variable that firms can easily observe, such as years of education.
The time path of the coefficient on the unobservable productivity
variable provides information about the rate at which employers
learn about worker productivity. Using data from the NLSY we obtain
preliminary estimates of the rate at which employers learn about
worker quality and use these, along with some strong auxiliary assumptions,
to explore the empirical relevance of the educational screening
hypothesis. We show that even if employers learn relatively slowly
about the productivity of new workers, the portion of the return
to education that could reflect signaling of ability is limited.
Joseph G. Altonji, Department of Economics,
Northwestern University Charles R. Pierret, Bureau of Labor Statistics, U.S. Department
of Labor
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