Although economists acknowledge that various indicators of educational attainment (e.g., highest grade completed, credentials earned) might serve as signals of a worker's productivity, the practical importance of education-based signaling is not clear. In this paper the authors estimate the signaling value of a high school diploma, the most commonly held credential in the U.S. To do so, they compare the earnings of workers that barely passed and barely failed high school exit exams, standardized tests that, in some states, students must pass to earn a high school diploma. Since these groups should, on average, look the same to firms (the only difference being that "barely passers" have a diploma while "barely failers" do not), this earnings comparison should identify the signaling value of the diploma. Using linked administrative data on earnings and education from two states that use high school exit exams (Florida and Texas), they estimate that a diploma has little effect on earnings. For both states, they can reject that individuals with a diploma earn eight percent more than otherwise-identical individuals without one; combining the state-specific estimates, they can reject signaling values larger than five or six percent. While these confidence intervals include economically important signaling values, they exclude both the raw earnings difference between workers with and without a diploma and the regression-adjusted estimates reported in the previous literature.
Martorell, Paco and Damon Clark, The Signaling Value of a High School Diploma. Santa Monica, CA: RAND Corporation, 2010. https://www.rand.org/pubs/working_papers/WR780.html.
Martorell, Paco and Damon Clark, The Signaling Value of a High School Diploma, RAND Corporation, WR-780-UFLA, 2010. As of February 15, 2024: https://www.rand.org/pubs/working_papers/WR780.html