Speed of employer learning

While some students will be able to go to college only if they receive financial aid and others have the resources to go wherever they want, most fall into a middle group that has to answer this question: Do they try to pay for a college that gave them little financial aid, even if it requires borrowing money or using up their savings, because it is perceived to be better, or do they opt for a less prestigious college that offered a merit scholarship and would require little, if any borrowing? It’s not an easy decision.

“It’s not just the sticker price and the net costs,” said Sarah Turner, professor of economics and education at the University of Virginia. She added, “How likely is it that you will get into medical school or law school or have some other opportunities” if you choose the more prestigious college?

That’s the rational argument. In these decisions, though, emotion often wins out, and it can lead to the slippery slope of excessive borrowing.

From a NYTimes article on measuring college prestige vs. cost of enrollment. Do parents have adequate data at hand to help make such an evaluation when choosing where to send their children to college? Where is the true dividing line between an elite school, where the connections generate meaningful returns, and an expensive but non-elite university, where you're just wasting money?

There is value beyond just your post-graduation earning power to going to an expensive, non-elite institution, but the party that will bear the debt should have more information up front to decide whether the trade-off is one they want to make.

One of the complexities of making such a decision is that a student often has no idea what they want to do after graduation and thus must make the decision without clarity on their likely earnings right after school. The difference between becoming a novelist  and going to Wall Street makes a huge difference on the model. To wit, going to an expensive institution if you plan on becoming a chef someday really seems like a terrible idea.

In a recent post at Marginal Revolution, Tyler Cowen noted that GMU graduates now earn higher average salaries than UVA grads, despite the fact that UVA is a more exclusive school by all conventional criteria.

The signaling model, in its simplest, most stripped down form, assumes that employers cannot judge the marginal products of individual new hires but instead pay them according to their credentials.  Yet here we have a case where employers seem quite willing to make a judgment about marginal product and indeed that is a judgment which contradicts data on exclusivity of academic origins.  Once you postulate that employers are willing to make estimates of individual marginal products which differ from the rankings that might be given by “raw ability,” the signaling model is  less applicable.  I don’t want to claim that the wages converge exactly on marginal products, but the credentials clearly are just one factor of many.  Employer judgments of expected marginal products are not dominated by credentials, and you can imagine that after having a worker for a year or two the credentials are even less important as a means of judging prospective marginal product.

Another way to put this point is that the speed of employer learning is in fact fairly rapid, and some of it happens before the job even starts.

There is an analogous depreciation of the signalling value of having a high profile company on your resume. So many folks have now worked at major technology companies like Amazon, Apple, Facebook, Google, and Twitter that the value of that signal on a resume has been diluted.

The speed of employer learning doesn't apply just to people just out of school.