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Imperfect signals

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  • Georg Graetz

Abstract

A pre-condition for employer learning is that signals at labor market entry do not fully reveal graduates' productivity. I model various distinct sources of signal imperfection - such as noise and multi-dimensional types - and characterize their implications for the private return to skill acquisition. Structural estimates using NLSY data suggest an important role for noise, pushing the private return below the social return. This induces substantial under-investment and causes output losses of up to 22 percent. Value-added-based evidence from Swedish high school graduates also points to noise and under-investment. Highlighting the distinction between schooling duration and skills acquired, I conclude that individuals likely spend too much time in school but learn too little.

Suggested Citation

  • Georg Graetz, 2023. "Imperfect signals," CEP Discussion Papers dp1919, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1919
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    References listed on IDEAS

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    1. Feng, Andy & Graetz, Georg, 2017. "A question of degree: The effects of degree class on labor market outcomes," Economics of Education Review, Elsevier, vol. 61(C), pages 140-161.
    2. Lisa B. Kahn & Fabian Lange, 2014. "Employer Learning, Productivity, and the Earnings Distribution: Evidence from Performance Measures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1575-1613.
    3. Georg Graetz, 2021. "On the interpretation of diploma wage effects estimated by regression discontinuity designs," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 228-258, February.
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