Signaling and Employer Learning with Instruments

52 Pages Posted: 28 May 2019

See all articles by Gaurab Aryal

Gaurab Aryal

University of Virginia - Department of Economics

Manudeep Bhuller

University of Oslo - Department of Economics; Statistics Norway

Fabian Lange

McGill University

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

The social and the private returns to education differ when education can increase productivity and also be used to signal productivity. We show how instrumental variables can be used to separately identify and estimate the social and private returns to education within the employer learning framework of Farber and Gibbons (1996) and Altonji and Pierret (2001). What an instrumental variable identifies depends crucially on whether the instrument is hidden from or observed by the employers. If the instrument is hidden, it identifies the private returns to education, but if the instrument is observed by employers, it identifies the social returns to education. Interestingly, however, among experienced workers the instrument identifies the social returns to education, regardless of whether or not it is hidden. We operationalize this approach using local variation in compulsory schooling laws across multiple cohorts in Norway. Our preferred estimates indicate that the social return to an additional year of education is 5%, and the private internal rate of return, aggregating the returns over the life-cycle, is 7.2%. Thus, 70% of the private returns to education can be attributed to education raising productivity and 30% to education signaling workers' ability.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Aryal, Gaurab and Bhuller, Manudeep and Lange, Fabian, Signaling and Employer Learning with Instruments (May 2019). NBER Working Paper No. w25885. Available at SSRN: https://ssrn.com/abstract=3394674

Gaurab Aryal (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Manudeep Bhuller

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Statistics Norway ( email )

N-0033 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Fabian Lange

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
30
PlumX Metrics