The Dichotomy Of Buying The Perfect Present And The Efficacious Ruse Of Undergraduate Degrees
Updated: Nov 13, 2021
By Shrusti Singh
Not long back, while deciding on a going-away present for my friend, I was left in a real quandary. Even after hunting for the perfect present for hours on end, I was still indecisive. But why?
What followed was a dichotomy of choice between a gift card and a sentimental material present which led me on to a scavenger hunt to justify one of my preferences and choose the perfect present.
On a second note, what would be your thoughts on a bachelor's degree and the current job market scenario? Some of you might side with the popular thought that 'University education does not prepare us for the job market' while some might posit that " A college degree facilitates job entry"
The question I'm going to put forth now might put you at odds with your rationality:
“What do you find oddly analogous among the above-mentioned situations, which seem to be unrelated in every possible manner?”
Any rational person would say that these situations are poles apart and there cannot be anything similar amongst the same. But as John Maynard Keynes said "Economics is a very dangerous science" and we economists believe in digging deeper. Before diving into that question, let us try to understand why there are two different viewpoints regarding University education.
Does a college degree not provide us with the relevant skillset required in the job market these days?
Or is a college degree our only golden ticket to the job market?
One way to look at this classical argument is by analyzing the two very popular, but contradicting theories at play here : “The Human Capital Theory” and “The Signalling Theory”.
The Human Capital Theorists believe that investments in human capital such as education, skill development, etc make an individual more productive and skilled which increases an individual's value.
According to this theory, education is a form of investment in human capital and those who invest in education are strategically calculating to increase their capital wealth, hence leading to higher incomes. Horace Mann, the father of the Human Capital Theory who was known for promoting education believed that the economic value of a person is based on her/his educational achievements, skills, and knowledge. Besides, educated individuals are responsible citizens. Making education not only a private win but also a social good.
Now let us assume a peculiar scenario: "A" has successfully passed his semester exams and received his undergraduate degree from a renowned university. But "B" who studies in the same university, two days before his final semester exams, unfortunately, contracts Covid-19. Unable to write his exams (assuming that he cannot sit for the exams again and with no other way around), he fails to graduate and obtain a degree. Forthwith, A and B both enter the job market. While A secures an impressive job offer, B does not. What a shallow world we live in ! Despite having the same skills, knowledge, learning experience, and being a student of the same well-renowned university, why did B face this particular obstacle? Why this prejudice?
The altruistic promoters of The Human Capital Theory might argue of this being unfair, by and large. And rightly so, after all, B's investment is almost identical to that of A's. To understand this imbalance we need to dive deeper. As Noam Chomsky, one of the founders of the field of cognitive science quotes: "The general population doesn't know what's happening, and it doesn't even know that it doesn't know." This phenomenon that he talks about, where one party has more or better information than the other of an economic transaction is known as "Information Asymmetry".
The functioning of the job market in such a manner, where despite having the same required skills, B got rejected from every job, is particularly attributed to the Signalling Theory.
In a market of asymmetric information, Signaling is defined as one party credibly conveying information about itself to another party.
This Signaling Theory was first developed by Michael Spence in his 1973 seminal paper "Job Market Signaling". In his model of job market signaling, Spence argues that the applicants or the potential employees send out signals about their abilities to the recruiters through acquiring particularly challenging educational qualifications or credentials. This signaling arises from the belief of the employers that an individual's productivity is positively correlated with his credentials (the more credentials she has, the more productive she is supposed to be). Spence talks about hiring in the job market being an investment decision under “uncertainty” where the employer plays a real gamble because she cannot know or predict the capabilities and the marginal product of an employee immediately after hiring her. Hence, to ascertain her assessment of this gamble, the employer sets out barriers to entry and a basic set of observable characteristics, upon which she can make informed decisions. This bias helps the employer to differentiate between employees with higher productivity and lower productivity merely based on their qualifications.
The advocates of the signaling theory reason that an individual who has been admitted to an esteemed college and has completed the degree exhibits dedication, leadership skills, and competency. All the while, believing that another individual who doesn't have a graduate degree does not possess the kind of skills the job requires.
In our case, what A and B are trying to convey by the means of their undergraduate degrees is their potential skill set to the recruiter. In essence, they are Signalling to their employers, in which case the undergraduate degrees act as a positive Signal. While as for B, failing to obtain a degree sends out a negative signal to the employer, and not having an undergraduate degree, rules out any possibility of him securing an equivalent job.
The signaling theory believes that college education adds nothing to the productivity of a college graduate only to be topped up with a high cost. This, in turn, places a wedge between people of different productivity leading to the employers and individuals believing in these credentials as mere rosy- screens or filters. Due to this theory prevailing in a majority of markets and quasi-markets, the wage gap between graduates and non-graduates has been increasing over the years.
(Note: exceptions cannot be ignored. In this case, degrees that require fieldwork/research work do add tremendously to the productivity of a student)
Source: ILO's India Wage Report (2017)
According to ILO's India Wage Report: "For urban regular workers – both male and female – the advantage of being more educated has also meant higher wage growth in the period 1993–94 to 2011–12. The wages for urban male and female regular workers with the highest levels of education increased by 73 percent and 69 percent, respectively, from 1993–94 to 2011–12".
As we can notice, there is a stark difference in the wages for those with a higher degree and those with secondary education. This only proves that the face value of a degree has been increasing over the years while the value of fieldwork and experience has been in the decline.
This phrase sums it all up:
In short, whoever you may be,
To this conclusion you’ll agree,
When every one is somebodee,
Then no one’s anybody!
~ W. S. Gilbert and Arthur Sullivan, The Gondoliers
Signaling, in a not so economic context:
Let us steer away from the classic economic arguments for a little while and talk about things that do not come under the Orthodox economic territory. Often, when you dig deep enough, economics sprouts out even in the most unexpected circumstances and fields.
One question that I often ask myself is: how do STEM Majors usually land high-paying finance jobs?
The Signalling theory might sound like a reasonable explanation to this question of ours. A STEM degree is as difficult as it can get, so in essence, this hard-to-obtain degree signals to the employer the competency and perseverance of the individual. Moreover, the recruiters feel that finance skills can be learned through entry-level jobs and on-the-job training. And hence the reason why entry-level jobs are designed specifically for recent graduates which do not require them to have any prior experience. The primary cause for this could be the popular belief of the employers in the job market, that university education does not add a significant value (in terms of the requisite skillset) to individual productivity and acts as a prerequisite for entry to the job market (their golden ticket). Furthermore, these entry-level jobs provide on-site training after recruitment, proving that the degrees are mere credentials or filters of hard work, and not the knowledge banks pre-required for jobs.
To understand why undergraduate degrees are losing their value, we need to dig even deeper and try to understand what credentialism or qualification inflation is.
Qualification Inflation and Signalling:
I have had my parents often telling me, how back in the 80s, having a bachelor’s degree was a substantial feat. And a person with a postgraduate degree was society’s big shot. But these days do we not feel obligated to have an undergraduate degree?Why is a drop year seen as a negative incentive in the job market? Why is it that students pursuing a certification course opt for an undergraduate course on the sidelines, knowing that the undergraduate course will not be of use to them? Is it just a plan B?
It might be that the opportunity cost of not getting a degree is very high. Is it just me or does everyone feel that the idea of having a mere credential has ingrained itself in the social norms?
In my opinion, the idea of owning a credential or a degree has further aggravated the social divide, all the while emboldening the unequal distribution of wealth, stratifying and distinguishing people with different means and incomes.
But the most important question we need to ask is why has the 16-year education term (high school+graduation) become an accepted standard of any cultured society?
This is a serious structural problem in our society that could use some decluttering.
The fundamental cause behind this shift can be accredited to the Qualification Inflation over the past 10 decades, with the first mention of it being in a 1973 book by Prof. Randall Collin: The Credential Society. Credentialism or Qualification Inflation is a combination of processes involving an increased demand for formal educational qualifications and devaluation of the same. The shift to a knowledge economy from an agricultural and an industrial economy is known to be a root cause for this inflation. There has been a shift from demand for physical labor to an increased demand for intellect.
We often like to portray ourselves as intelligent, and it is natural to do so because everybody wants to stand out from the crowd. We feel a sense of fulfillment when we accomplish something that is not easy to come by (for example: getting into your dream school/ university). And with everybody wanting to signal their intellect to the recruiters, the number of degree-holders over the past few decades has significantly increased.
As per the 2019 OECD report on “Benchmarking Higher Education System Performance”: the number of 25-34 year-olds with a university degree is forecast to grow from 137 million as of 2013 to 300 million by 2030. This figure is significantly high in developing countries, where the shift to the knowledge economy has just come about. And this number is only going to grow, leading to the origin of unique and sector-specific requirements in the job market, where a degree will probably (or maybe it already is) lose its value over time.
Now getting back to the very first dilemma that we put forth: “the conflicting conundrum of a choice between a gift card and a material present”. I would like to put forth two practical arguments, to rationalize the preference for both gifts:
● The argument for a gift card
Think of it as giving cash to a person. The person on the receiving end can exchange it for anything they like anywhere they want. Sounds decent enough.
● The argument for a material present
The rationale behind buying a material present is somewhat funny but credible to its core and rather natural to human nature. Practically, when you give someone a present that is of particular interest to them, the present acts as a Signal. The person who has bought the present signals to the receiver that she has put in endless hours to find the perfect present, further conveying that the person deeply cares about, knows, and adores the receiver. Likewise, this action displays the strength of affection.
This stunning economic concept is all around us. Take for instance a lover buying gifts during courtship or when individuals buy an expensive and valuable engagement ring, signaling to their partner the dedication and affection towards each other. One can also notice the signaling game in markets for cars. The crucial decision of buying a car: to buy a Jaguar or a Hyundai. Both cars serve the purpose and provide the same utility to the user, the only difference here being that a Jaguar signals luxury and prosperity while a Hyundai does not. Take a look at the markets for high-end branded clothes, mobile phones, high-end consumer products!
The bizarre similarity between all these phenomena is 'Signals'. They are all around us.
And thus ends our gimmick of elegantly rationalizing the weirdness and madness around us.
These Signals now appear to be everywhere. That is the charm of Economic Imperialism. Good old economics in every nook and corner of this enigmatic world.
Now as you go out into the world, make sure not to miss out on any signals out there. Because the world is but a peculiar place, and you never know when you stumble across someone trying to convey those “signals” to you.
Shrusti is an economics student at Hansraj College
References
1. International Labour Organization. (2018). India Wage Report [Wage policies for decent work and inclusive growth]. International Labour Organization. https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---sro-new_delhi/documents/publication/wcms_638305.pdf
2. Spence, M. (1973, August 1). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355–374. https://doi.org/10.2307/1882010
3. ICEF Monitor. (2019, July 17). OECD: Number of degree-holders worldwide will reach 300 million by 2030. ICEF Monitor. https://monitor.icef.com/2019/07/oecd-number-of-degree-holders-worldwide-will-reach-300-million-by-2030/
4. Wikipedia. (n.d.). Signalling (economics). Wikipedia. https://en.wikipedia.org/wiki/Signalling_(economics)