More than a piece of paper—the economics of University education

Source: (iStock, n.d.)

Why do people still choose University education when there's a wealth of information available online for self-learning? I often wonder aloud to my friend whether the benefits of attending university-run 'summer boost camps' outweigh the costs, especially when so much of the content they offer is freely accessible online?

This question becomes even more compelling considering the vast amount of educational material freely available on the internet. Yet, students around the globe are eagerly competing for spots at universities, like the University of Manchester, for example. What motivates this ongoing dedication to it?

Some might argue that attending university often leads to better outcomes than self-learning with online resources. Unfortunately, economics doesn't offer a straightforward answer to this. However, economists have introduced a different perspective that goes beyond mere productivity.

The heart of the matter lies in something seemingly simple - your diploma. Let's explore this idea through market signalling, a concept that helps explain why your degree represents much more than just a piece of paper.

Imagine you're in charge of hiring for a successful company. Your job is like solving a puzzle: figuring out which candidate will add the most value to your company. The tricky part? You don't know the candidates - how productive they are or how much they can contribute. You're doing this blindfolded. While some applicants may claim they've got all the right skills and are ready to go, it's hard to tell who's genuinely skilled and who's just pretending. As Human Resources (HR), you're stuck in a bind: do you risk missing out on undiscovered talent by rejecting everyone, or do you risk hiring unskilled candidates in the hope of finding those few gems?

This dilemma springs from what's called asymmetric information—employers just don't have all the details about a candidate's abilities. This uncertainty makes them hesitant to commit to someone untested.

This is where your educational background comes into play, acting like a beacon that says, "Hey, I've got what you want, and it is guaranteed!" Essentially, the value of university education is in its signalling effect. Your degree is proof of your academic accomplishments and reduces the risk of you being considered a 'lemon'—someone who pretends to be productive but isn't, in the job market. It highlights qualities employers value highly, helping you to stand out from the crowd.

The market signalling mechanism benefits both the company and the highly productive, specialised candidates.

Yet, the reality is that university education's signalling itself doesn't completely clear up the fog of asymmetric information in the job market. In fact, there have been voices asking whether university degrees provide Reliable Signalling. The idea is that there has been a shift in norms where many leading companies have changed their mindset about requiring degrees. For instance, companies including Google, Netflix, Apple etcetera are hiring people without degrees (Pelta, 2020).

Put yourself back in the shoes of a human resources professional. Keep in mind that it's impossible to grasp the dynamics of the job market fully. With extra difficulty,  recall the previous paragraph, now with some certain jobs, you cannot even identify whether one is productive or not with their degree! This sheds extra light on the market’s fog with uncertainty.

With this dilemma as a recruiter, you can't rule out the risk of hiring a 'lemon'—your wage offers will have to be based on your expectations about the candidates' true abilities. This leads to what's known as a 'pooling wage,' a wage set based on your expectation of the market after adjusting for the risk of hiring less productive workers.

Interestingly, your wage offer is influenced by your expectations. If you end up hiring a few lemons, you might become more pessimistic and cautious, lowering the wages you offer to future candidates as a result.

In reverse, pooling wages also impacts the pool of productive candidates in the market. Consider this: based on the survey, graduates from the top 10 universities in the US, on average, would demand to receive the pay 50% more than other graduates who are still graduating from top 100 universities but not top 10 (Gaskell, 2020). It makes sense for someone who has worked this hard for the top 10 universities to earn the extra amount. The problem is, with the uncertainty and asymmetric information the HR team is facing, they are not willing to offer that extra amount!

As a result, very likely, I'd opt out of the market either by changing an occupation or just going to another country. This decreases the chances of finding productive candidates, which in turn could lower the 'pooling wage' even more. This creates a vicious cycle known as adverse selection.

To break free from this cycle, candidates need to aim for more than just the 'pooling wage'. The challenge is to convince HR that they are indeed worth a higher wage. This is where the role of market signalling kicks in.

In essence, the lasting attraction of University education, even with the wealth of free learning materials online, is complex. It's all about the strategic importance of education as a market signal—a beacon that showcases a job seeker's potential and quality to potential employers. This strategic role highlights why university education is crucial for standing out in a competitive job market, despite the intricate challenges posed by economic concepts like adverse selection. In the end, skilfully navigating the job market's complexities is key, making not just formal education, but also other channels like apprenticeships, not just a quest for knowledge but also ways to signal your value.

Bibliography:

Gaskell, A. (2020). Do Universities Provide Reliable Signaling? [online] Forbes. Available at: https://www.forbes.com/sites/adigaskell/20        20/12/15/do-universities-provide-reliable-signaling/?sh=960d0ba8e80c.

iStock (n.d.). 187,000+ Graduation Stock Photos, Pictures & Royalty-Free Images - iStock. [online] www.istockphoto.com. Available at: https://www.istockphoto.com/photos/graduation.

Pelta, R. (2020). Experience or Education: What Do Employers Want More? [online] FlexJobs Job Search Tips and Blog. Available at: https://www.flexjobs.com/blog/post/education-vs-experience/.

Varian, H.R. (2020). Intermediate microeconomics: with calculus. New York: W.W. Norton And Company.