Question

What do the findings of Chetty et al. (Tennessee STAR paper) and Chetty, Friedman, and Rockoff (long-run effects paper) imply about the human capital vs. signaling models of the returns to schooling?

Answer 1

The key difference between signalling and human capital models is that signalling models allow firms to draw inferences about unobserved characteristics of workers. Those inferences can be based on the schooling or work experience of workers, or on direct measures of some aspects of job performance. Many recent empirical findings can be better explained by signalling models than by human capital theory. Given the explanatory power of signalling models, standard estimates of the social return to secondary schooling are in large part capturing differences in affective traits, such as perseverance, which were acquired either in primary school or at home.

While a pure human capital model predicts higher university attendance in regions containing a university, it predicts no difference in the high school dropout rate. In contrast, signaling allows for the possibility that higher university access may actually discourage high school graduation.

Under the educational sorting hypothesis, an environment in which some individuals are constrained from entering university will be characterized by increased pooling at the high school graduation level, as compared to an environment with greater university access. This happens because some potential high school dropouts and university enrollees choose the high school graduate designation in order to take advantage of high?ability individuals who are constrained from entering university. This is in stark contrast to human capital theory, which predicts higher university enrollment but identical high school dropout rates in regions with greater university access.