Spence in his development of the theory of signaling indicates closely ties the uptake of education. This is mandatory because an achievement of valid credentials is essential when sending a signal to the prospective employer or buyer. This theory looks at education as an individual’s effort regardless of the cost of attaining the credentials that form the basis for the trust between the sender of the interest signal and the recipient.
In developing his theory Spence makes numerous foundational assumptions. He assumes that for employers to go out and start scouting for prospective employees there must be a vacancy existing that needs a specific set of skills and personality. He understands the pool of skills existing at the time can be divided into a symmetrical set of “bad” and “good” employees. This selection depends on the real value that these employees will bring to the organization. The employer may not predict if the person he is signing up will be good or bad hence he pegs the question of pay on some evidence given by the education credentials submitted by the prospective employee. Though Spence identifies that education may not necessarily increase the rate of production, he concurs with the idea that good employees have a less opportunity cost.
Based on this theory it would turn out that “good” employees would take up the initiative of acquiring more education than the “bad” employees. This will necessitate an effective signaling process that has a direct impact on the process of wage negotiation. This is sometimes called the Sheepskin effect that clearly defines the difference in the wage offered to those who chose to clear their years at college and those who chose not.
The theory of human capital takes the wholesome approach to feeding the human resources market. This theory takes into consideration the different attributes of a prospective employee including his personality, creativity, knowledge and other cognitive capabilities that will enable him to take up the task and accomplish it effectively. In order to capture all these factors that play a vital role in the selection process and the subsequent performance of duties, the education sector has been pushed to development curriculum that is whole rounded.
The theory of human capital also looks as the role of different groups and stakeholders in the setting up and running the education sector. For instance, the government, according to this theory, takes up the duty of subsidizing all training that is directly related to acquisition of job skills relevant in the job market. Organizations have taken a keen interest in studying the rate of unemployment in order to peg it to a specific set of causes that can be handled so as to tailor training for the benefit of the job market. This has resulted into a closer operation between the operators in the job market and education providers.
In order to capture the rate of return accruing from uptake of education, we have to bring into perspective the social and private returns that we can directly link to education. For instance, the rate of return we can refer to as private refers to the cost that the student bore compared to the benefits that come after course completion. Students costs include the tuition fees and any earnings he may have foregone as a result of his engagement in the education system. The rate of return socially captures the benefits that come as a result of the contribution offered by the education to the social structure. This contribution comes in a form of public education facility improvement and payment of taxes.
Psacharopoulous in his works on the social and private rates of returns reveals that increased levels of education reflects in increased incomes hence an increase in the rates of returns both socially and privately. Cases in point included the private rate of return for an investment in a bachelor’s degree, in Australia capped at around 9.5 percent for a male citizen and at around 13 percent for female citizens. Socially in New Zealand, the rate of return is estimated at around 16 percent.
Signaling theory - Empirical evidence
Using data from the US bureau of census for the years ranging from 1971 to mid 1970s, Riley explains that the human capital theory is not consistent with the implications that the signaling theory attaches to education. According to his findings, there is a big difference in the estimate of the earnings someone accumulates over time regardless of the duration of time they take in the education system. An alternative model adopted by Kropp and Lang looks at the static properties comparatively. This approach looks at the effect of legislating the mandatory length of time an individual should take in school or the age of a graduating student. The result of their study reveals a striking evidence of the signaling process.
Another study done by Bedard is based on the effect of the incentive offered by colleges and universities to high school graduates. He indicates that this is largely a move towards increasing high school and college drop outs due to the flooding of the university with average individuals. This resulted in a 33 percent increase in the number of high school dropouts
It is vital to note that education has played a vital role in the process of hiring employees in the job market. Though this is the case in most economies, two opposing theories bring to light the need for re-evaluation of the position of education in human resource.
Works Cited
Card, D. and Krueger, A.B. Does school quality matter? Returns to education and the characteristics of public schools in the United States. Journal of Political Economy, 1992.
Hedges, L. V., Laine, R.D. , Greenwald, R. 'Does money matter? A meta-analysis of studies of the effects of differential school inputs on student outcomes. Education researcher, 1994.
Psacharopoulos, G. Returns to education: an updated international comparison. Comparative Education , 1996.
Quiggin, J. Approaches to Measuring Efficiency and Effectiveness in Schools Education, . Canberra Schools council, 1994.
