Question

It could be argued that college degrees correct a possible market failure for employers looking for good employees. (a) What is the perceived market failure? (b) Would free college and student loan forgiveness, policies advocated by some democratic presidential candidates, correct the market failure? Explain.

Answer 1

a. In the job market, there is imperfect information on both sides of employer and employee. This leads to market failure. The employer does not know all the details about an employee. So to gain an advantage over the other applicants and convey information about skills and knowledge, college degrees are used as a signalling device. For a long time, since the prospective candidates could not show their skills, they used to show their college degree as a signal. This will help solve the problem as the employer would get an understanding of the individual's skills and knowledge. If an individual was determined to pursue higher education, it will act as a good signal to the employer.

b. No these won't help solve the problem. The problem here is becahse of imperfect information as neither of the parties have access to full information about the other. Free college or student loan forgiveness would just mean everyone would go get a degree which will not help degree act as a signalling device anymore.