“Signaling and Productivity in the Private Financial Returns to Schooling”, 2015-06-20 (; similar):
Does formal schooling contribute to individual labor market productivity or does it act as a signal to employers of predetermined labor market skills?
We test for whether employers statistically discriminate between workers on the basis of their schooling, by assuming we can observe a proxy for worker productivity that the employer cannot—father, brother and co-twin earnings. Using population-based Danish administrative data:
we find that employers initially statistically discriminate be-tween workers on the basis of schooling, but schooling earnings differentials fall overtime as employers learn about worker productivity.
We further propose a novel test for job market signaling using differences in twin pair earnings growth, and find that signaling is important at the upper end of the schooling distribution—explaining a large proportion of the college wage premium.