There are other explanations for why workers with more education receive higher wages, however. One alternative theory attributes the higher pay to the greater productivity from schooling. According to the training or human-capital model, schooling increases students' skills (human capital). Reading, writing, problem solving, knowledge of engineering or economics, and other skills and information that people are taught in school are valuable to firms. Wages rise with education because each year of education provides workers with additional useful skills.

(A neo-Marxian theory says that school provides "toilet training" rather than training. According to this theory, schools train or condition people to show up on time, dress properly, and exhibit other traits that employers value. Although this theory differs from the human-capital model as to what is being taught in school, both these models predict that wages should increase with the years of school because students become better employees.)

Do the signaling and training models have different implications? If firms use the number of years of schooling as the signal, then both theories say that wages should rise with years of education. The implications differ, however, if an extreme version of the signaling model is used. In this sheepskin model, firms observe the signal whether or not people get a diploma (sheepskin) for graduating. If employers care only about the sheepskin signal, wages do not vary with the number of years of schooling, unlike in the training model.

Economists have examined data in many countries to see whether people get higher wages if they have more years of schooling or if they have a degree. If wages do not increase with years of education, we can reject the training model. If receiving a diploma does not increase a worker's wage, the sheepskin model is wrong. It is, of course, possible that both models are rejected by the evidence if schooling does not provide either training or a useful signal, so wages do not rise with education.

It is also possible that neither is rejected: schooling provides useful training and serves as a signal. A sheepskin effect may be consistent with a training model even in the absence of signaling. Completing school may reflect superior aptitude or the ability to finish projects.

The evidence from around the world strongly indicates that wages rise with the years of education, which is consistent with the training theory. The evidence is not as clear cut whether people with a diploma receive more than people with nearly as many years of schooling who did not graduate.

Weiss (1988) concluded that the wages of American workers rise with schooling, a finding that is consistent with the training theory, and that workers get an additional increase in earnings with a degree, which is consistent with the sheepskin hypothesis. He reported that the increase in wages from completing high school is more than three times as great as the increase in wages from completing eleventh grade. (Weiss attributes much of the extra earnings of high school graduates in semiskilled manufacturing to lower quit rates and lower absenteeism rates. He reports that the return to an extra year of schooling for all Americans is 4.3% compared to only 3.7% for the semiskilled manufacturing workers he studies.)

In a study of Dutch workers, Groot and Oosterbeek (1994) found strong support for the training theory but not for the sheepskin effect. They rejected two screening hypotheses: that more rapid completion of a degree signals greater ability and should lead to higher earnings, and that years spent in education without obtaining a degree should not increase earnings. They use statistical techniques to control for IQ test scores and work experience when calculating the returns to education. They find that each extra grade raises wages of males by 4.3% but that each extra effective year of education (taking account of skipped grades, repeated years, and so forth) raises wages by 6.5%.

Grubb (1995) directly tested the sheepskin hypothesis, and found support for the signaling hypothesis. He examined the return to education for people employed by others and for self-employed individuals, who have no need to signal an employer. After controlling for grades and other education, he found that salaried men with a college B.A. degree earn $5,563 more than men without a degree, compared to only a $2,843 difference for self-employed men. The comparable figures for women are $4,649 and $623 (though there are few self-employed women in his sample). (These returns to a college degree are statistical significantly different from zero using a standard criterion for salaried but not for self-employed men and women.)

SOURCES:

Groot, Wim, and Hessel Oosterbeek, "Earnings Effects of Different Components of Schooling: Human Capital Versus Screening," Review of Economics and Statistics, 76(2), May 1994:317-321; Grubb, W. Norton, "Postsecondary Education and the Sub-Baccalaureate Labor Market: Corrections and Extensions," Economics of Education Review, 14(3), September 1995:285-299; Weiss, Andrew, "High School Graduation, Performance and Wages," Journal of Political Economy, 96(4), August, 1988:785-820.