TAILIEUCHUNG - Ten Principles of Economics - Part 42

Ten Principles of Economics - Part 42. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 19 EARNINGS AND DISCRIMINATION 423 view when people earn a college degree for instance they do not become more productive but they do signal their high ability to prospective employers. Because it is easier for high-ability people to earn a college degree than it is for low-ability people more high-ability people get college degrees. As a result it is rational for firms to interpret a college degree as a signal of ability. The signaling theory of education is similar to the signaling theory of advertising discussed in Chapter 17. In the signaling theory of advertising the advertisement itself contains no real information but the firm signals the quality of its product to consumers by its willingness to spend money on advertising. In the signaling theory of education schooling has no real productivity benefit but the worker signals his innate productivity to employers by his willingness to spend years at school. In both cases an action is being taken not for its intrinsic benefit but because the willingness to take that action conveys private information to someone observing it. Thus we now have two views of education the human-capital theory and the signaling theory. Both views can explain why more educated workers tend to earn more than less educated workers. According to the human-capital view education makes workers more productive according to the signaling view education is correlated with natural ability. But the two views have radically different predictions for the effects of policies that aim to increase educational attainment. According to the human-capital view increasing educational levels for all workers would raise all workers productivity and thereby their wages. According to the signaling view education does not enhance productivity so raising all workers educational levels would not affect wages. Most likely truth lies somewhere between these two extremes. The benefits to education are probably a combination of the productivity-enhancing .

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