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Human capital versus signaling is empirically unresolvable

Nick Huntington-Klein ()

Empirical Economics, 2021, vol. 60, issue 5, No 15, 2499-2531

Abstract: Abstract Economists offer two main explanations for the causal labor market returns to education. The first is human capital accumulation: Education improves ability. The second is signaling: Education allows high-ability students to distinguish themselves. A major point of interest is the relative contributions of these effects. I demonstrate the theoretical and empirical conditions necessary to identify the relative contribution of the two models. Then, I review the existing literature to evaluate whether the feasible set of empirical estimates is capable of meeting those conditions and so informing theory. Empirical evidence is capable of rejecting pure human capital and signaling models and usually does so. I argue that, for the general question of relative contribution, necessary identification conditions are not met, and partial identification bounds are wide. Two models with different nonzero contributions of human capital and signaling cannot be empirically distinguished, limiting the usefulness of human capital versus signaling as a framing for understanding the return to education and for policy.

Keywords: Human capital; Signaling; Identification; Education; I23; I26; J24 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00181-020-01837-z

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