Note: while Aco continues the Econ 101 series, allow me to squeeze in with some more advanced topics. Usually, in our university, the better teachers are assigned in introductory courses. In our cafe, the manager assigned Aco, our best barrister, to serve the younger, funkier customers...
Updated note: a version of this entry was published in The Jakarta Post (15/8/06).
Why do many people hopes to get higher education, university degree in this case?The most common answer is because having a university degree makes it easier to find job. Actually, this is not the correct answer. Several researches have shown that people with high school diploma or lower have greater chance to be employed or to switch jobs. Especially after the economic crisis, people with higher education are more likely to be employed.
The correct answer is: to get a
better-paid job. True, university diploma does not make it easier to get job. But certainly it enables one to have higher salary.
Why then higher education gives higher earning? The answer seems to be obvious. Education provides workers extra skill, which enables them to be more productive. Since workers are rewarded in the labor market based on their productivity, it is the higher productivity which brings them higher earning. Hence, the higher one’s educational attainment, the higher his or her wage. This is the Beckerian answer to the problem.
But such view was not too convincing. Labor market, like any other market, is not perfect. Employers can not evaluate the true productivity of potential workers before he or she starts working. But we know that typical job application process, the wage rate is agreed in advance.
So, on what basis will wage rate be determined?
According to Stanford University's Michael Spence, in the world of asymmetric information, employers only assume higher educated workers are more productive. Not that a college graduate in is actually more productive; it is what the employers believe to be. So, to distinguish oneself in a stack of application, a job searcher shows his/her university diploma to signal the prospective employer that he/she is a productive type. In other words, higher wage is a reward for the diploma one gets, not a worker’s true productivity.
He wrote his seminal article in 1973 [1] - and his model was then called "the signaling model." Spence won the 2001 Nobel Prize in economics, together with George Akerloff and Joseph Stiglitz.
What does the model imply?
The signaling model changed the way people looked at how labor market works. The fact that signaling mechanism partly, or mostly, determines the market wage setting has an important implication. University degree helps increasing wage as long as those with university diploma accounts for only a small fraction in the labor market. When the share of university graduate grows, it will no longer be an effective signal. Employers will look for new type of signals to distinguish workers, such as more advance degrees (Master’s, Ph.D.), professional degrees (CPA, CFA), or graduating from 'top' universities (err... UI?).
When the government subsidizes university tuition fees, it makes higher education cheaper and more accessible. It will increase the supply of college educated workers. However, it may not be useful because employers will increase their expectations subsequently. For that reason, subsidizing university tuition does not make a good social investment. It may even have an adverse effect: a large pool of highly educated unemployment.
[1] Spence, A.M.: "Job Market Signaling", Quarterly Journal of Economics Vol. 87, No. 3 (1973), pp. 355-374.
Education | Labor market | Signaling
maybe i should read the paper, but isn't that really a bit obvious? commoditizing a product will always do that, no?
ReplyDeleteT/S: It's as obvious as a Columbus egg -- so easy, once someone points it out! (BTW, a lot of economics is like that).
ReplyDeleteA.p.: Your concluding paragraph is misleading.
You said, "For that reason, subsidizing university tuition does not make a good social investment. It may even have an adverse effect: a large pool of highly educated unemployment."
Here, your assume that university education is only good for signalling for employment. But university education teaches many other things that are socially beneficial. You cannot conclude whether university subsidy is a worthwhile social investment or not on the basis of Spence's signalling model.
You guys should help boost education more. I don't see anyone in our government taking this matter seriously. I am gravely concerned with what will become of our younger generation (we can't do anything about the old ones, can we?).
ReplyDeleteEducation is incredibly expensive in Indonesia. It's still deemed as a luxury and not a form of right. Yes, we do have the obligatory primary education campaign but look at the quality of our government shools. More (wealthier) parents nowadays send their children to private-managed schools because they think the quality is better than all those govt-provided ones.
Who loses in this case? Bright children who don't have rich parents who can send them off to some swanky private schools! Yes, they will succeeed if they endure in hard work, but that means they have to put in a lot of extra effort on their own.
Sorry for the blabbing. This is a topic that I'm very passionate about and I can go on and on and on :-)
A concept closely related to Spence's model and other signaling models of education is what is called the "sheepskin effect" *), the reward one gets from the labor market for getting a diploma over and above that of years of schooling. The empirical evidence on this is mixed, however.
ReplyDelete*) Not to be confused with lambskin, for those of you whose mind tend to wander during long, boring econ lectures.
Morningdew: What do you mean by "Education is incredibly expensive in Indonesia". For basic education, it's not -- especially with the recent BOS (despite flaws).
ReplyDeleteIs the quality of public school poorer than that of private school? From the abstract of this paper:
"Students that graduate from public junior secondary schools, controlling for a variety of other characteristics, score 0.15 to 0.3 standard deviations higher on the national exit exam than comparable privately schooled peers."
Of course, education quality can always be improved. One way an economist can help is by figuring out which policies work to improve school quality, such as this one (or, for one being done in Indonesia, this one)
Arya, I should've said "good quality primary education". My comment was based on a personal experience when looking for a primary school for my son back in Jakarta a few years ago. I did opt to send him to a public school but when I saw the topics they cover, it wasn't as diverse as the ones private schools had to offer (they don't even teach English, if I'm not mistaken). Aside from that, I heard some teachers actually imposed "additional lessons" for the students (at an additional cost, of course) and for those who didn't sign up for these lessons, their grades would seemingly be lower than the ones who did. But then again, this topic could fall into a different discussion altogether.
ReplyDeleteI guess what I'm trying to say is that if we were to compare the subjects given in public primary schools with those given in private schools, one could say that private schools offer more variety hence enhancing the child's mind to be more creative etc. Correct me if I'm wrong, but I don't think there are painting/music/storytelling/reading subjects in public schools in Indonesia, let alone other extra-curricular activities like science/robotic clubs. Are they even taught how to use the computer in public schools? I don't think so.
Remember, the keyword is primary education, which I think is foremost important as that is the formative years where children develop their thinking skills.
AP, sorry for taking your post out of context. Sincere apologies :-)
i am grinding my head to find labor stats in Indonesia. you guys have one on quearterly basis? BPS only have yearly figures on their website.
ReplyDeletecalling out for next writing to tie it with unemployment or wages rate. again, not enough data available on this. perhaps i should turn to alternative source, like our own LD?
govies, always a dissapointment...
From the economist: http://economist.com/world/asia/displaystory.cfm?story_id=7279166
ReplyDeleteShengda students pay more than twice the fees of a Zhengzhou University student in exchange for a degree certificate with the words “Zhengzhou University” on it. The decision in June to add the word “Shengda”, they felt, drew unwanted attention to the fact that this was not quite the real thing. In a fiercely competitive job market (despite rapid economic growth, graduate unemployment has been rising), one word could make a grave difference. Employers often regard graduates from private or quasi-private universities as inferior to those from state institutions.
--------------
Perhaps someday I will insist to have my gradcert reprinted as "Classic ITB", to distinguish myself with recent graduates. Perhaps.
employers only assume higher educated workers are more productive?
ReplyDeletehahaha!
Most of them just waste their employer's time by writing blogs!!!
AP,in plain English, you are saying that employers hire higher educated personnels, not because they're more productive (for this cannot be known during the interview, except the candidates themselves and, perhaps, psyschologists :-)); but simply because, I guess, the higher educated employees are certified for having their as#@s burnt while sitting in boring lectures for a few more years than the lower educated ones. A quality that indeed suits the employer's need: enduring the boring tasks :-)
ReplyDeleteHey, by the way, don't we supposedly defend our profession at the higher education institution -the university-, mate? :-) We funny.
Arya: note the phrase "for that reason" in the beginning of my sentence. I wrote only on the context of the model. In reality, Spence's model may be (partially) incorrect, of course -- just like any other models.
ReplyDeleteRizal: you rephrased it very well:
"...but simply because, I guess, the higher educated employees are certified for having their as#@s burnt while sitting in boring lectures for a few more years than the lower educated ones."
as for defending our profession; we've done our job, no? making those poor students believe they are smarter?
Indocup: well, at least my bosses thought that the Harvard graduate in their institutions is more productive (don't have to tell them the reality, though...).
AP: My issue is with drawing what sounded (to me) like a policy prescription straight from a theoretical model. "For that reason" does not justify the policy prescription "subsidizing university tuition does not make a good social investment".
ReplyDeleteTo illustrate, I can say that in the context of Spence's model: "subsidizing any kind of education beyond primary school does not make a good social investment". But this would be misleading, no?
I'm jumping a bit late here, but i can't resist muddling the fray. Never miss a good party, the wisemen said.
ReplyDeletea few things:
- my very first comment: commoditizing, isn't that obvious in the economic sense, ie. Economists supposedly figured this one out loooong time ago already?
- on Morning dew and Primary education and Harvard titleist: i think for the benefit of this discussion we will need to separate the discussion on primary education as this do not diretly deal with the employment market (assuming the economic environment do not consist too much of sweatshops). The state of primary education on average in this country is depressingly ugly, especially in rural area and generally them people responsible for this should be criminally liable. I still don't get how the const. court etc get away with this crap.
To the Harvard/Yale/Cambridge/Oxford graduates among us, i think we ought to exclude ourselves from the equation since we are recognizably superior based on brand value alone and not neccesarily substance (the same apply, to lesser degree to the ITB/UI graduates)
frankly this is misleading and already is a recognized problem among employers (can't remember exactly where, but some Fortune surveys confirm this excess premium burdened upon us.
In the main issue of potential employer value of particularly-generic degree* i think theory should be fairly simple: employer will look for the most significant indication of suitability for the particular task. Keep in mind the much quicker pace of change in the economic/business environment as well as the social/academic output, then business simply seek the most distinct/promising/credible attribute.
In particular industries such as IT where i am fairly familiar with, higher education degree bears little relevance, especially when compared to specific accreditation/certificate from very specific skills (ie. MSFT/Cisco/Oracle certified). Earlier in the Net euphoria days, it is enough to drive down the Valley with an MSc, these days, if you're not certified in a particular technology then you might as well find job as a tech support.
Employer with better resources also seek very specific skills and/or improve the recruitment process (google/microsoft/mckinsey etc) are particularly interesting to note where their recruitment process are significantly harder than most universities entries exams.
both changes in the supply mechanism (over supply of generic/mediocre quality) and demand (higher demand for specific skills lacking in the existing system of production, ie, higher education curriculum) results in a new environment, i think, that puts the much higher importance in Primary/Sec education (up to highschool/junior diploma), to prep for the best basics possible, and then basically throwing the poor souls into the open market for them to decide what's best and what's most effecient.
It is interesting along this line that in the UK highschool grads have similar employment level to those with higher degree in the states (i'm pretty sure of this but can't quote).
In any case, this is embarassingly too long for a half baked comment. Very interesting discussion tho.
My most sincerest apology to the proprietor of the coffee and its stakeholders for this disruption.
*i know
I like this book, and here is the author's take (for UK context, but still relevant in general):
ReplyDelete"..The strange thing about this obsession with "relevant" courses is governments' repeated failure to understand what relevant means. The skills which the modern labour market rewards are, increasingly, the "academic" ones - language and mathematics..."
"...From detailed studies of the workplace, we know that constant changes in techniques, a decline in old-style manual jobs, and a symbiosis of mathematics and IT, are creating a growing demand for employees with multiple and general skills. Senior businessmen apparently have convinced ministers that "soft" skills are now more important than academic ones when hiring: but one should look at what people do, not what they say. In the hard data on earnings and employment, there is no evidence of any such substitution and plenty to suggest that good academic results are worthwhile..."
well, always, the dynamic is vastly different as i will suggest that it is a lot harder these days to even define what 'soft skill' is. Programming used to be a soft skill, now it's a proper academic course. Programming in a particular language for example, could easily be replaced by newer tech in 2 years time and thus be assigned to soft skill.
ReplyDeleteSome qualifications are so entirely new (programming for example) that it will be too damn hard to qualify that as a 'soft' or 'academic'. Three years ago, an autistic hermit can be billionaire, these days, they need to be able to lead and blog.
I'm just not so sure that the line's so clear cut. Does the book explain this? i haven't read.
The basic premise remains that higher educational system needs a differentiating factor to offer some sort of competitive advantage above the peers. and to effectively produce this to meet the demand of a growing/dynamic economy Government will never be able to do - their very nature of a systematic institutionalization of compromises will always keep Gov't two steps behind. Of course always with the exception of the elite few.
gov't should create a just opportunity, let the stupid bugger decide whether they will stay three years in college or not.
they're not in business of telling people what to learn, particularly when they appear to be failing in their own learning.
they should concentrate on the economy instead.
PS: the word verif says: "stdysakx"
I am not kidding. Swear!!
AP., i think, your problem is that you evaluate social return (social investment) by using signalling theory. Unfortunately, signalling theory, if i am not mistaken, cannot be used to justify social benefit-that's one of the disadvantages of signalling model.
ReplyDeleteBtw there is a good article about this debate (Human Capital Model Vs Signalling Model) by Andrew Weiss in Journal of Economic Perspective Aug 1995(Human Capital vs. Signalling Explanations of Wages)
For the sake of consistency in explaining education-productivity in micro level, human capital model is far better...he..he..he..
(proponent of human capital theory :D )
A.P
ReplyDeleteI think the idea of signalling model in Labor market is : the relatively lower cost of education for high skill people rather than the low skill labor. With difference in cost of schooling between the high and low skill labor, the equilibria is the high skill labor will tend to go further into high education, while low skill will prefer to take a lower education. In this type of equilibria, education indeed is a signalling of the quality of the worker.
Th problem is this signalling method have some problem explaning situation if many people have at least bachelor degree. Is the bachelor degree still a good signal for quality of labor?
Is the signalling model able to explain why graduates from Harvard, MIT, YALE, (any other Ivy League) and UI, ITB in Indonesia case is assumed have a better skill than that of any other universities? Why do graduates with higher GPA is assumed to have a better quality than people with lower GPA?
I think rather than the absolute signalling model (as poroposed by Spence-high and low level of education), right now we need to have a "relative" signalling model. The latter theorem means that although worker have the same level of education, your grades (GPA) and what is your former university is more important nowadays to be a signal of quality. Hence, it is not variety in the level of education but the variety in within the same level of education.
I know this method has been discussed in the game theory (the admission process for graduate school is one of the common example of this bayesian game- it is about the ex-ante belief and how the admission commite update their ex-ante belief based on the past experiences on certain applicants from the same country and university). But I hardly reckon any application of this method in labor market.
In Short : the signalling game (by spence) is good to explain situation in past 10-20 years. As long as you are university graduate, it is easier for you to enter the labor market. While nowadays, it is not the case. High level of education is not a good signal of education anymore ( may be because it is jammed :-D). Employer need a better signal for quality, such as the university where you get your degree and your grade (GPA).
CMIIW
ok, i must admit that i wasn't interested commenting the topic coz i personally think that AP only stating the obvious. yes, there is a high correlation between higher education and salary. however, i'm suspecting a"backward bending" curve here. In a very high and very specified degree (phd, cfa, etc...) someone become the specialist in a very certain matters, thus the job/project available for her will be limited.
ReplyDeleteif the price of education is the proxy of investment in education then i also agree that subsidizing "us", the seeker of higher education will create a heap of high qualified unemployement. the job market and the employer that willing to pay at the market wage are very limited. --> the backward bending curve (again)
but i can't help not commenting to several of you:
aryaall do respect, i don't know where the college/university you went but my university year don't give me much of social benefit. those year has given me list of nagging ex(es), spent large amount of fuel, and several stupidity that i vows never ever done again (so help me God). the cool thing that happened to me was i still got the subsidy. =D
morningdew i understand for your frustration, and true sometimes we even made fun of your concern. but sadly, (cheap) formal primary education is not the answer for everyone. and mind you, some of the smartest asses in this country went to the worst public school in the rural area for their primary education. at this point, we should focus in other things rather than the quality of the education. infrastructure and access is probably the main factor and we truly can do something about this. my point is, yes we need cheap, good schools but that won't guarantee of a better opportunity of surviving the real world.
indcoup we can assure you that me and my friend at the uni do the blog in our spare time. we do have lots of that. we don't work with formal working hour like most of you expats do. and being productive means that you can finish your job in the efficient way, thus leaving you plenty of spare time.
treespotterok, what do you mean by commoditizing? could you explain that further? to economist, there's a market for everything. the only thing that don't have market is the public goods. people use to think education is public goods but i think that depend which education we are talking about. As for the quality of employee candidate, we all know very well that the university and the degree might not given you much information. and this applied in the "business world" where people seek for other meassurement of the quality of the candidate. however, i should remind you again that here, we discussing at the macro scope where we tend to generalized thing. if you say this is the flaw of econ, then i'll say this is our teritory =D
Dhani,
ReplyDeleteOf course you don't get the social benefit -- society should be the beneficiary of the social benefits of putting lots of people like you to the university.
You, on the other hand, get all the private benefits in the form of those inflated salaries from whatever logo got printed in that graduation certificate of yours... ;-D
Dhani, I still beg to differ. Like I said to Rizal a while back, if we keep on focusing on short-term-gain problem solving, then this country will never be able to plan its future for the long run. Every situation (aka problem) will be solved as they occur. I still think a long-term plan is needed to build our nation's future. Maybe the benefit/result might not be seen in our lifetime, but like all other investments, it will take some time for this country of ours to pick the fruit of good education for its children.
ReplyDeleteSo, once again, I might not be an economist, therefore, my standpoint is certainly not backed up by flashy econ theories, but I do believe some people (esp the government and those providing them advice) are focusing too much on short-term fixes and not spending enough time trying to come up with a grand scheme of things for the long run.
dhani: commoditizing, when everybody is a uni graduate, then it becomes a commodity, no? you're the one who's been on and on about scarcity?
ReplyDeleteand well, i disagree to the primary education bits. primary education should be kept separate as there really should be a degree of responsibility/ the minimum threshold that the gov't should keep, i believe primary education is crucial and the gov't should commit to its constitunal mandate.
again, i'm also not an economist and not familiar with all these flashy economic theories - as dhani also points out, many are simply the Art of Explaining the Obvious - but i'm sure there's a difference between subsidizing oil and providing education. Gov't providing a good standard of primary education is not subsidy, it's their job.
Oh, one more thing, Dhani. About your remark that you sometimes make fun of my concern, who do you mean by we? I never got that impression from the others before, so it's actually quite amusing to read you self-admittting it. Maybe it would've been better for you to use the word I, instead :-)
ReplyDeleteouchh...
ReplyDeleteyou guys should sort this out, is this about higher education, and its relevance to the labour/employment market or are you talking about basic primary education for everybody?
perhaps the manager and other smart people could step in?
T/S: On whether subsidising primary education is a justified subsidy, Yudo's comment above provides some hints (but, unfortunately, not enough meat) on the difference between subsidising primary vs. university education.
ReplyDeleteYudo, if you may elaborate the (return to) human capital approach, please? ;-D
This comment has been removed by a blog administrator.
ReplyDeleteArya, thanks for the note. I am sure there's a huge difference between the two. Important as it is, i'm struggling to draw the parallel of painting/music/storytelling/reading in primary school to the distinguishing value of a uni degree in employment market.
ReplyDeletePerhaps someone can elaborate the vernaculars for us common non-economists out here?
on the side, as always, two girls arguing, things go everywhere. dew, before you go around identifying the abundance of morons out there, i am sure your skills for observing details can accurately point out that you were taking the post out of context, as you yourself pointed out.
In the spirit of Independence tho, i'm admiring your awesome nationalist spirit that takes a longer view of the country. Perhaps you care to visit this homeland more often? More than anything, i think this country needs people like you who know how to fix the long term interest of the country.
I am signing off now and leave it to the manager to sort out this mess now.
Yet another good excuse to have a lesbian manager in place.
dew. yes, i was trying to make fun of you for throwing your tantrum on your child(ren) education here. chill out girl... we're talking about higher education here. which in many ways, have a very different situation with primary education. and this is just a cafe please... someone put something on my coffee obviously...
ReplyDeletearya i still think society doesn't benefit much from my college year. ask around if you don't believe so. =D
treespotter can we take this outside the cafe? ;)
dhani, no, i'm staying in here to watch you two slug it out.
ReplyDeletenever had so much fun hangin out with economists before!
LOLOL
DHani: If you answer yes to any of the following:
ReplyDelete(a) Do you pay taxes?
(b) Do you have friends from university that still think you're worth the friendship?
(c) Do you take part in social activities that make use of skills learned in university (including blogging or blog-commenting)?
(d) Do you do some charity or make contributions from that income of yours that got "inflated" (if you believe Ape's argument) by your university degree?
Then, indeed, you've given society some social benefits (or losses? ;-D), rooted in your obtaining a university degree. Even if you don't, some of your friends might have done so. To calculate the social benefits (to allow judgment of the worthiness of such social investments), one needs to estimate and add all of them up and compare with the subsidies given by the government.
Going back to the gist of my contention with AP's original statement "subsidizing university does not make a good social investment", Yudo, I think, has correctly pointed out the problem: We cannot infer this from Spence's signalling model. Instead, we need to compare the different social returns (benefits) to human capital, then argue for social (read: public) investments in education that gives "the biggest bang for the buck" in terms of social returns.
Meanwhile, if the difference is solely in the form of inflated salaries, these are private returns. People who want future inflated salaries should pay for as high a school as they want themselves.
T/S: This also explains the difference between social investments in primary school vs. university. The social benefits of providing primary and secondary school -- some argue up to junior high -- among others, in terms of increasing the quality of social interactions, better overall human capital, and so on, are good reasons why the government should subsidize lower-levels of education (and why it's more difficult to make such justifications for higher education).
Arya comes with the concept of human capital (thanks ya..:D) and I want to show some figures.
ReplyDeleteI calculated social-private return of education for 2003 figure. I found that social return of higher education was 5.46 % much higher than that of secondary school while private return of higher education was around 18.2% much higher than that of secondary school. This gap is quite high compared to social-private benefit gap of secondary or primary school.
Another comparison, I found that the average income of worker graduating from college was only 3 times as much as the average incomes of worker completing primary school. Regarding cost, a college student spent, averagely, 11 times as much as a primary-school student. This gap actually was relatively low compared to the average figures of other developing countries (Psacharopoulus 1972).
Looking at social-private return to education, it is really hard, I think, to advocate a subsidy program for higher education while at the same time more than 57 percent of children aged 16-18 have never attended senior-high school (around 40 percent never attended junior school). By Aco’s Econ 101: A starter, we know that the opportunity cost of subsidizing higher education is too high. So, it’s better to allocate our money for low-level education, isn’t it?
My friend made a joke about this. He said that I am proposing a reduction of subsidy for higher education after I already enjoyed the subsidy (as I graduated from subsidized-university). Without subsidy, he continued, you might not graduate from the university or even made research opposing subsidy. Perhaps, he is right and it seems to be such contradiction. But highlighting the issue will, hopefully, remind those bloody policy makers that there are 50 % of unlucky children (13-18 years old) who never attended secondary school and need great attention.
i think i pretty much get the difference between the two, which was why i asked for someone to clarify whether this post was talking of higher education or primary education.
ReplyDeletejust wondering really, how does gov't providing education - Primary education here - be considered as subsidy?? i mean, isn't it really the same as gov't providing infrastructure etc? i mean if everything that the gov't pay for public consumption are considered subsidies, why do we need to pay tax at all? indeed, why do we need the gov't at all?
I wasn't the one who brought up primary education, i've a dog. my dog don't really need a robotic clubs and i went to private schools all the way, so i enjoy no 'subsidy'
i thought the post was pretty clear on employment, and degrees and signalling and all that...
blah, maybe i should shut up...
bad day, sorry guys. signing off now. let's move on to the next lesson.....
Yudo and Arya, I share your arguments. We might not want to overplay Spence's signalling model as to assess whether or not subsidy for university is justified.
ReplyDeleteAs for the discussion, this might be related.