Education is now seen as a right, and by some, as a duty of government. However, this was not always the case, and some, including George Mason University economist, Bryan Caplan, argue that it no longer should be.
Does education actually increase graduates’ productivity or is it just a signaling device?
In the mid-19th century, industrialized countries rapidly expanded education through public funding, and, whilst it slowed around the 1970s, spending on education as a percentage of GDP has remained high ever since[i]. The principle belief behind such high education expenditure is that it produces not only private economic benefits, but also social ones.[ii] Whilst conceding that graduates obtain higher wages, Caplan argues this is largely a result of graduates using their degrees as a signaling device to employers, rather than actually being more productive than non-graduates[iii]. Indeed, with Australia planning to publicly spend $9.8 billion across the 2018/19 financial year on tertiary education, it is worth investigating the merit of Caplan’s arguments.
Does the signaling effect show up in the data?
There are many studies which examine if degrees truly increase graduates’ productivity or if it is just a signaling device. Caplan references the General Social Survey (GSS), as it is one of the largest surveys of the US public done by an independent research institute with data dating back to 1972.
The GSS finds that whilst graduates benefit from a 10.9% increase in salary per year of education, this plummets to 4.5% if the obtainment of a diploma is taken into account. This is monumental in giving credence to the signalling theory. Why? An easy way to explain this is to consider a student who is in their second year of a three year bachelor degree. If you only looked at the marginal salary increase they gain from completing their second year, you would find they experienced a 10.9% pay rise. If you looked instead at the fact that they haven’t completed their degree yet, you would find they only experienced a 4.5% pay rise. Upon completion of the three years, however, their wage would rise by 31.4%. What makes the signalling theory so likely to be true in light of this is the fact that the final year of a degree is not any more likely to be packed with more marketable, practical skills than any other year of the degree – It is completion, having the piece of paper in hand, that gives rise to the wage premium.
Do some degrees add more to actual productivity than others?
The signalling effect is certainly present, but does it hold true across all degrees? Do some degrees actually raise productivity whilst others function more as a signal?
Caplan argues that most degrees do not increase productivity, but grants some leniency to degrees such as engineering as their specialized nature gives them practical skills possessed by few. Moderately useful degrees include business and education, as they may not be necessary to enable their graduates to work but can provide a competitive advantage. Liberal arts, philosophy and women’s studies are of low usefulness, not even pretending to prepare their graduates for work, proclaiming the ideal of, ‘knowledge for knowledge’s sake’.[iv] It is difficult to verify the varying degrees of actual ‘usefulness’ of different disciplines. Whilst proficiency in STEM fields such as maths are certainly found to be related to higher earnings, [v] the question remains whether such proficiency actually heightens one’s productivity or if proficiency in maths is merely a signal to employers. Herault and Zakirova (2011) indicate that in Australia, higher education is more likely to be more of a signal whilst VET and other vocational courses contribute much more visibly to actual productivity[vi].
Do degrees contribute any social economic benefits?
Critical to understanding Caplan’s thesis is being able to distinguish between the benefit to society, and the benefit to the individual graduate. Caplan sees the social benefit as the boost in productivity the taxpayer gets from university subsidies. The selfish benefit is the salary boost graduates get compared to non-graduates. Indeed, evidence from the US suggests that the graduate wage premium rose rapidly around the 1980s, when education became far more plural[vii]. Coupled with his evidence that degrees form a signalling device rather than contributing to real productivity, Caplan forms the argument that public funding of education provides little to no social gain.
However, a broader economic approach would consider a deeper analysis of the various positive externalities. One such study from McMahon from the University of Illinois (2010), posits that lower public health and prison costs, a more functional democracy, greater political stability, and social capital, are some of the external benefits of education.[viii] McMahon concludes that short term marginal benefits, such as increased productivity from one’s education, are smaller than the long term external benefits aforementioned.[ix]
Stay at school, kids
In conclusion, Caplan offers a thought provoking critique of university funding, although the issue is far from settled among economists. Whilst there are grounds to question Caplan’s estimates of exactly how much education is mere signaling, his central premise that education is not preparing students for the workforce is identifiable in the data. But whilst your education might not make you more productive in the workplace, it may bring you many other benefits in the long term – it’ll keep you out of jail and hospital, and of course, (the answer we’ve all been waiting for), pretty much guarantee you a higher wage than those who don’t attend university.
[i] ROSER, M. & ORTIZ-OSPINA, E. 2018. Financing Education. Our World in Data. accessed March, 13.
[ii] An externality is a consequence (positive or negative) that is not reflected in prices, i.e, is outside of the economic domain.
[iii] CAPLAN, B. 2018. The case against education: Why the education system is a waste of time and money, Princeton University Press.
[iv] Ibid. p37
[v] Ibid., p83-5
[vi] HÉRAULT, N. & ZAKIROVA, R. 2011. Sheepskin effects in the returns to education: accounting for enrolment and completion effects.
[vii] 2018. Going to university is more important than ever for young people. Available: https://www.economist.com/international/2018/02/03/going-to-university-is-more-important-than-ever-for-young-people, ibid.
[viii] McMahon, W. 2010. The External Benefits of Education. University of Illinois.
[ix] McMahon, W. 2010. The External Benefits of Education. University of Illinois.
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