Fresh out of college and in a respectable job, I ask myself the question many do in my position: “Why am I not using anything I learned in college?”
Despite working at a respectable firm in “economic consulting” I have to admit to myself and others that anyone who can pick up excel can do my job. My transcript is filled with economics courses with long names when all I needed to learn was how to use the “sumif” function. I suspect that I’m not alone in observing this curious aspect of society. I will suggest some potential explanations centered (of course) around economic interpretations of the value of college, with a particular emphasis on the game theory concept of signaling.
The core idea of signaling is from Nobel Laureate Michael Spence. Imagine a world where there is one employer and two types of employees: bozo and gunner. Each type of employee knows what type he is, but the employer does not. This world is highly inefficient, especially if the ratio of bozo to gunner is high. The employer fearing that she will hire a bozo employee will pay lower to all employees; she cannot differentiate between types. The gunner is paid less than he is worth, and the bozo are paid more than they are worth. Overall, the world suffers (except the bozo, unless of course they themselves depend on the sub-par work now being generated).
So what if the gunner decides to stand out? Maybe the gunner will wear a suit to the interview to show how hard working he is. The bozo would then also wear a suit; a salary is worth more than a Men’s Wearhouse suit. The gunner tries to “signal” his type by taking on a costly action, but this action is too cheap for the bozo type. Maybe gunner could use a costlier signal, say take an econometrics class. Bingo. Econometrics wards off the bozo type, not even a good salary is worth the econometrics to the bozo. In this world, the gunner takes econometrics classes, the employer will only hire and pay well those who take econometrics classes. The bozos are kept out. The key is that the signal is costly to both parties, but more costly to the bozo types. The signal has to be in the sweet spot. If it’s too costly neither type will signal and we go back to the world before. In a world of asymmetrical information, the gunners signal and the world is better off.
How does the idea apply to college? Spence’s brilliance is suggesting that college need not improve or even teach anyone. I didn’t go to college to learn job skills, I went to college to show employers that I’m someone who works hard. College’s societal purpose is to act as a costly signal, one to weed out the gunners from the bozo. At the end of college you receive a brand consisting of some letters (NYU, UVA, BC, MIT…) and typically a two decimal number (3.90, 4.00, 3.65…). This acts as your signal. The theory goes that typically a gunner will get better letters and better numbers by working hard. College acts as the signal for a the hiring world, mired in asymmetrical information.
All this has interesting implications and allows us to make certain predictions about the value of college.
The simplest implication is that of degree inflation. A bachelors is not enough anymore, the masters is the new bachelors. As colleges inflate grades, it makes it too “cheap” of a signal. This is akin to making econometrics as easy as buying a suit, the value of the signal is destroyed. Employers then require most costly signals such as masters degrees in order to separate the bozo from the gunner. A possible solution then to degree inflation is simply tighten standards across bachelor granting institutions. Perhaps reintroduce Greek, Latin, and gymnastics as required courses (as argued above it doesn’t matter what the subject is, as along as it’s hard).
Note that the key cause of signaling is asymmetrical information. If the employer had perfect information, there would be no need for signaling. She would just hire them as she sees them. In a world of more asymmetrical information, we would expect the value of the signal to matter more to everyone. One could argue that the raising costs of college is in portion due to the changing nature of the economy. During the industrial revolution based on manufacturing it was easy to see who would be a good worker; the one with the biggest biceps. In the modern economy based on skills generally unobservable in the short run (during an interview it’s hard to see how much someone is willing to grind learning excel), there is more asymmetrical information. The employee now holds knowledge that is even more unknowable to the employer. The school and GPA (as effectively a compendium of exams) act as a signal for these unobservable characteristics. Of course there are other reasons for the raising cost of college, amongst which are government subsidies, societal norms, and degree inflation. Perhaps it would be useful to run a hedonic regression to see exactly how much value of a college degree is from its purpose as a signal.
However, in a world of reduced asymmetrical information, we would expect a reduction in the cost of college. How might a world like this come about? I argue that we are likely to see this world come about through the internet and associated technology. As the internet diffuses through society (even more than its current use), it can reduce asymmetrical information by revealing characteristics on profiles anyone can browse.
We already see some evidence of this in the various trust building services associated with the sharing economy. Services such as Airbnb, Uber, and Taskrabbit run into problems related to asymmetrical information. When renting out your house for the weekend on Airbnb, how do you know your guests won’t ruin the house in a “drug induced orgy”? (http://www.huffingtonpost.com/2015/05/07/couples-airbnb-nightmare_n_7232722.html). Put simply, when using a sharing platform, we run into the same problems as an potential employer. We can’t tell between bad guest/good guest or good driver/serial killer on first glance. Services built around solving this problem (such as Trustcloud, Trustribe) utilize a unique technological solution. These services verify someone’s identity, and then aggregate their past history. Suddenly we can see the entire history of Joe on one page: how good of a guest he was the last time he rented Airbnb in San Diego, how he serves beverages to his Uber guests, and how satisfied his Taskrabbit clients are.
It’s not too much a stretch of imagination to see the same concept applied to employment. It might take form of a super detailed linkedin of sorts. The page might track and verify the number of hours you spent using excel. With the advent and proliferation of webcams and touch screens such a site can actually track in real time and with great accuracy the effort you put into learning or mastering skills. Once sufficient reputation is established in the accuracy of such a service, employers can just browse Joe’s page rather than look for Joe’s degree. With the asymmetrical information reduced by the sheer reduction in cost of acquiring information about an prospective employee, the need for a signal (in this case a degree) would plunge.
This is of course, in an idealistic world. To draw another analogy from the sharing economy, adoption is not always smooth when faced against vested interests. Interests that benefit off of the existing status quo will resist, using the law, public relations and whatever to fend off changes, even if those changes would benefit society at large. Cities are considering banning Uber at the insistence of taxi drivers, threatened by the service. Similarly, if the world I described were to occur, we can imagine that vested interests such as universities would attempt to halt such change. It could use the law. With billions in collective endowment, some of that money can go to legislators to enact laws raising legal barriers against trust services, probably in the name of “preserving the quality of education”. Universities could engage in a massive media campaign, working together to discredit in the public mind the trustworthiness of trust sites. Even degree holders, or the various industries that thrive off of universities (Test prep services etc) would be threatened and might take up arms. These interests might be successful (at least temporarily) in halting progress.
Until that day comes, I’ll be sitting here at my desk mulling over economics and the future. I did after all, go to college.