Your Credential Signals Little About Your Skills & Knowledge to Your Employer

The Changing World of Work 4: The “Signal” Value of Credentials Is Eroding (April 16, 2015) by Charles Hugh Smith
bachelors_degree2

An entire new feedback loop of accreditation is needed, and fortunately that feedback is within our control: it’s a process I call accredit yourself.

Economist Michael Spence developed the job market signaling model of valuing employees based on their credentials in the 1970s. The basic idea is that signaling overcomes the inherent asymmetry of information between employer and potential employee, i.e. what skills the employer needs and what skills the employee actually has is a mystery to the other party.

Credentials (diplomas, certificates, grad point averages, test scores, etc.) send a signal that transfers information to the employer about the opportunity cost the potential employee sacrificed for the credential.

It is important to note that the credential doesn’t necessarily signal the employee’s actual skills or knowledge– it only signals the amount of human and financial capital the employee and his family invested in obtaining the credential.

It is important to note that the credential doesn’t necessarily signal the employee’s actual skills or knowledge– it only signals the amount of human and financial capital the employee and his family invested in obtaining the credential.

Signaling boils down to something like this: if Potential Employee A graduated from a prestigious Ivy League university, and Potential Employee B graduated from a lower-ranked state university, this doesn’t signal that Candidate A is necessarily more intelligent than Candidate B; it does signal, however, that Candidate A probably worked harder to get into and graduate from the prestigious school.

The signal is: Candidate A will work harder for the employer than Candidate B, all other qualifications being equal.

The Signal Value of credentials is the entire foundation of higher education. The higher education system does not actually test or credential the body of knowledge or working skills of graduates; it simply accredits that the graduate sat through a semi-random selection of courses and managed to pass the minimal standards–or alternatively, that the graduate gamed/cheated the system to gain credit without actually doing any real learning.

The reason tens of thousands of parents are sweating blood to get their child into an Ivy League university is the signaling power of that degree is widely viewed as having the near-magical ability to guarantee lifelong highly compensated employment.

But the power of higher education credentials is eroding for systemic reasons.

1. Credentials of all sorts are in over-supply: there are more people holding credentials than there are jobs that require those credentials.

2. Higher education does not prepare graduates for the real world of work in the emerging economy, so the signaling value of a diploma has been lost.

3. The opportunity cost paid by those graduating from college is now more noise than signal.

4. The intrinsically ambiguous signal value of a credential cannot be substituted for real-world accreditation of real skills and working knowledge.

In essence, the failure of signaling to accredit actual skills and knowledge bases is being acknowledged by employers. This accreditation is precisely what diplomas fail to do. Specialty programs (nursing, medicine) accredit the skills and knowledge of the graduates, but this is not true of the vast majority of diplomas and credentials.

The job-market value of a college degree was relatively high in the 1970s when Spence developed the Signal Model because the number of workers with college diplomas was still relatively modest (around 15% of the workforce). The most basic function of the market–supply and demand–worked in favor of what was relatively scarce–a college diploma. As a result, the assumption that the applicant had worked hard to obtain the degree was more signal than noise.

Nowadays, conventional credentials such as college degrees are in over-supply:around 40% of the work force has a college diploma of some sort, and an increasing number of college graduates are taking jobs that do not require a college education.

This is reflected in the declining wages of college graduates: Even the Most Educated Workers Have Declining Wages.

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