Question

Empirical studies in Economics and Education have proven without a doubt that a college education is worth it, from a cost-benefit analysis. While obviously not all colleges and college degrees are created equal, earning a college degree significantly boosts annual wages, on average. The question is however, what are the exact channels through which college education improves earnings? I will offer you 3 "theories" and I will ask you to tell me which of the 3 you think are valid explanations (can be more than 1) and also which do you think is the most important one? There is no correct or wrong answer here. I simply want you to think about it and properly reason your answers.

1. The human capital theory - by getting a college education, students acquire and develop skills that increase their productivity in the work force, which results in higher wages.

2. The college selection theory - people who go to college are overall smarter/harder working/more productive/etc. to begin with. These people would have gotten higher wages even if they hadn't gone to college. College attendance just happened to be there. This is essentially a story of a spurious correlation. This theory claims there is no causality between attending college and earnings, but simply that college attendance correlates well with certain innate abilities which are rewarded on the job market.

3. The signaling theory - people who earn college degrees are overall smarter/harder working/more productive/etc., but the reason they earn higher wages is that they earned a degree and that degree signals to employers that these students are overall better workers. This is an incomplete information story - employers do not know how productive you are but they can infer that from you having a degree. Unlike theory 2 states, these students would not have earned higher waged had they not gone to college simply because there wouldn't be anything to certify to employers that these students are truly more productive.

Answer 1

After analyzing all the theories above we can infer from each theories as :

1. The human capital theory - by getting a college education, students acquire and develop skills that increase their productivity in the work force, which results in higher wages.

Only college education without skill enhancement does not increase the productivity in the work force . If students are attending the skill development programs in the college education than only it will lead to the productivity in the work force. Because it will lead to human capital productivity.

2. The college selection theory - people who go to college are overall smarter/harder working/more productive/etc. to begin with. These people would have gotten higher wages even if they hadn't gone to college. College attendance just happened to be there. This is essentially a story of a spurious correlation. This theory claims there is no causality between attending college and earnings, but simply that college attendance correlates well with certain innate abilities which are rewarded on the job market.

While selecting a college , if the college has a huge name than it will surely lead to the enhancement of the student because mostly those type of colleges select students on the basis of their early education personality as well as on certain compititive exams. Thus the students can only enter that college if he is intelligent and hard working and more productive. Thus the students mostly work on ground level and thus their earnings in the future are more.

3. The signaling theory - people who earn college degrees are overall smarter/harder working/more productive/etc., but the reason they earn higher wages is that they earned a degree and that degree signals to employers that these students are overall better workers. This is an incomplete information story - employers do not know how productive you are but they can infer that from you having a degree. Unlike theory 2 states, these students would not have earned higher waged had they not gone to college simply because there wouldn't be anything to certify to employers that these students are truly more productive.

This theory is mostly applicable beacause the employers do not have other knowledge about the person because the only thing in front of him is the persons CV which is the only document which can tell about the person to the employer.