Diploma Effects

The SAGE Encyclopedia of Economics and Society Diploma Effects

Contributors: Uttam Gaulee Edited by: Frederick F. Wherry & Juliet B. Schor Book Title: The SAGE Encyclopedia of Economics and Society Chapter Title: "Diploma Effects" Pub. Date: 2015 Access Date: April 2, 2016 Publishing Company: SAGE Publications, Inc. City: Thousand Oaks, Print ISBN: 9781452226439 Online ISBN: 9781452206905 DOI: http://dx.doi.org/10.4135/9781452206905.n219

Print pages: 553-554 ©2015 SAGE Publications, Inc.. All Rights Reserved. This PDF has been generated from SAGE Knowledge. Please note that the pagination of the online version will vary from the pagination of the print book.

SAGE Contact SAGE Publications at http://www.sagepub.com.[Page iv]

SAGE Reference

Diploma effects are usually defined as disproportionately large increases in returns to schooling after the completion of a certain number of years that usually entail a degree. Diploma effect is a notion that challenges or rejects the intrinsic value of education, including higher education. Diploma effects take place when employers preferably make hiring or promoting decisions favorably for individuals possessing diplomas or degrees over those without such credentials just because they have a degree, diploma, or certificate. Possession of a degree provides individuals the advantage of signaling to their prospective employer that they are more productive. This signaling effect is widely known as a sheepskin effect, the extra advantage coming out of the degree or diploma (the sheepskin!). Diploma effects remain an intriguing subject of investigation for economists in their attempts to explain the dynamics of labor market imperfections. The idea of diploma effects emerged against the backdrop of human capital theory and continues to be refined in light of subsequent empirical research giving new insights to economists and sociologists. Employers usually select individuals with diplomas, often without due evaluation of the personal, social, or cognitive skills of the degree holders. Because it is often difficult to assess those skills, employers have traditionally relied on possession of a diploma as a proxy for enhanced skills in their prospective employees. Very often, even diplomas are evaluated on the basis of the issuing institution’s prestige. The intrinsic value of higher education has long been questioned with the argument that the earnings premium associated with the possession of a college degree is not due to the effect of education received in the academy. Rather, the large earning gap between college graduates and nongraduates can be explained by what critics of the academy describe as diploma effects. Because testing the cognitive skills of prospective employees by employers is prohibited by law in the United States, the latter rely on colleges, which in turn are free to select their students using various standardized test scores. The diploma effect argument is that employers consider the selection done by colleges or universities rather than the effect of college education, which adds little or nothing to the labor productivity of the college graduate. What college degrees do is serve as a signaling or filtering function: They provide employers with some information that is likely useful. Because employers have to make decisions based on the limited information available about their prospective employees, they choose candidates with diplomas. This argument of diploma effects contrasts with human capital theory. Human Capital Argument Because the idea of diploma effects fundamentally contrasts with the traditional idea of human capital, understanding human capital theory helps explain diploma effects. In 1964, research conducted and theory developed by Gary Becker (and later by Milton Friedman and Jacob Mincer) clearly established a connection between the education and training (along with medical care) of a population and the economic and social benefits that extend specifically to the individual but are enjoyed in general by the populace and government as well. An extrapolation of the theory is that earning increases corresponding to years of schooling received. This framework, along with the now common idea that an approximately $1 million earning premium exists for an individual completing a bachelor’s degree, remains the premise for individuals to continue attending college and for governments to encourage their citizens to do so. Page 1 of 3

The SAGE Encyclopedia of Economics and Society

SAGE Contact SAGE Publications at http://www.sagepub.com.[Page iv]

SAGE Reference

Research Studies Exploring Diploma Effects There are some empirical studies investigating the question. Tom Wood, a former academic correspondent for the National Association of Scholars, divides empirical work on sheepskin effects roughly into three periods. The first period of studies (from the late 1960s through the first half of the 1990s) could only use information on earnings and years of education, apart from the background variables. Hungerford and Solon’s 1987 study found that students finishing 8, 12, and 16 years of schooling would show significantly larger gains than those who completed only, say, 7, 11, or 15 years of schooling, respectively. Even though degree completion information was not available in the database (only data on the number of years of schooling completed were available), the spikes in income gains for those who completed 8, 12, and 16 years of education show that it was the effect of the certificates or diplomas (the sheepskin!) those students would usually obtain at those milestones. The second period of studies, beginning in the early 1990s, included additional information on degree completion. These studies found that completion of a bachelor’s degree entailed a dramatically higher income growth than the income growth associated with the completion of 1, 2, or 3 years of college. The researchers used unique data sets that contained both the old and the new measures of educational attainment to estimate the sheepskin effects. They claimed that they found larger diploma effects than they would have if the information they worked on had been limited to the education variables available to previous researchers. The marginal effect of completing a bachelor’s degree over attending “some college” was found to be as much as 33 percent, conditional on attending school for 16 years. With the advent of richer databases, the third period of empirical studies included information on the measures of cognitive skills as well. The addition of such skills made it possible for the later research studies to really put human capital theory to the test. With the databases providing information on the development of cognitive skills, the results could show a finer picture of education effects versus diploma effects. The Dialogue Continues Overall, there are at least three types of arguments regarding diploma effects. The first set of arguments can be summarized by the screening theorists or credentialing theorists, who argue for and emphasize the existence of diploma effects or sheepskin effects. In addition, supporters of such theories tend to reject the idea of human capital theory. Rather, they believe that the socioeconomic success of those with more formal schooling is explained by their power to control access to elite positions. The second set of economists like to complicate the argument by taking a middle ground. They point out that the sheepskin effect may not be inconsistent with human capital theory. While they seem not to reject the idea of human capital, they do not reject screening theory either. Their argument is that because education adds to human capital by raising the productivity of individuals, credentials just go on to verify those educational effects. Notably enough, however, the third set of economists, doing empirical research in recent years, continue to find relevance in the classic idea of human capital theory. In spite of the existence of research suggesting that diploma effects do exist, this category of economists did not find significant differences in the earnings of individuals possessing diplomas and those not possessing one but having an equal number of schooling years. A recent study exploring the signaling value of a high school diploma Page 2 of 3

The SAGE Encyclopedia of Economics and Society

SAGE Contact SAGE Publications at http://www.sagepub.com.[Page iv]

SAGE Reference

found that the practical importance of education-based signaling is not clear. Researchers estimated the signaling value of a high school diploma by comparing the earnings of workers who barely passed and barely failed the high school exit exams. Using linked administrative data on earnings and education from two states that use high school exit exams, the researchers estimated that a diploma has little effect on earnings. See alsoCredentialing; GED (General Educational Development); Human Capital; Signaling Value of Education Uttam Gaulee http://dx.doi.org/10.4135/9781452206905.n219 10.4135/9781452206905.n219 Further Readings Hungerford, Thomas and Gary Solon. “Sheepskin Effects in the Returns to Education.” The Review of Economics and Statistics, v.69/1 (1987). Jaeger, David A. and Marianne E. Page. “Degrees Matter: New Evidence on Sheepskin Effects in the Returns to Education.” The Review of Economics and Statistics, v.78/4 (1996). Martorell, Paco and Damon Clark. “The Signaling Value of a High School Diploma.” Working Paper, RAND Education, Pittsburgh, Pennsylvania, 2010. Park, Jin Heum. “Estimation of Sheepskin Effects Using the Old and the New Measures of Educational Attainment in the Current Population Survey.” Economics Letters, v.62/2 (1999). Wood, Tom. “The Sheepskin Effect.” National Association of Scholars (July 30, 2009). http://www.nas.org/articles/The_Sheepskin_Effect

Page 3 of 3

The SAGE Encyclopedia of Economics and Society