Signaling and Employer Learning with Instruments
Speaker(s)Manudeep Bhuller (University of Oslo, Norway)
LocationTinbergen Institute Amsterdam, room 1.01
Date and time
May 28, 2019
16:00 - 17:15
The social and the private returns to education diﬀer when education can increase productivity and also be used to signal productivity. We show how instrumental variables can be used to separately identify and estimate the social and private returns to education within the employer learning framework of Farber and Gibbons  and Altonji and Pierret . What an instrumental variable identiﬁes depends crucially on whether the instrument is hidden from or observed by the employers. If the instrument is hidden, it identiﬁes the private returns to education, but if the instrument is observed by employers, it identiﬁes the social returns to education. Interestingly, however, among experienced workers the instrument identiﬁes the social returns to education, regardless of whether or not it is hidden. We operationalize this approach using local variation in compulsory schooling laws across multiple cohorts in Norway. Our preferred estimates indicate that the social return to an additional year of education is 5%, and the private internal rate of return, aggregating the returns over the life-cycle, is 7.2%. Thus, 70% of the private returns to education can be attributed to education raising productivity and 30% to education signaling workers’ ability.