28 Feb

What is a University Degree Worth – Signalling Theory

If you’re a late teenager reading this, unlikely you’ve met a long term partner/spouse. For those that have, congratulations!
Let’s assume you study economics at university, graduate and work at a hedge fund for 5 years, then leave and join a new fund founded by your ex-boss who appoints you as co-founder and partner. You’re now a millionaire in your late 20s and thinking of settling down. All you need is a spouse and a few kids.

As fate has it, you find yourself at a speed match-making event, trying to stand out from the sea of potential competition. What’s the one thing that might set you apart? That’s right: the university you studied at or the fact you’re the youngest partner at your firm, or perhaps the shiny Patek on your wrist, casually mentioned in every 2-minute conversation. As you poetically speak through all the countless all-nighters you pulled, trades you executed you may be inadvertently applying the signalling theory of education in the quest for love. After all, if you survived and accomplished all of that, surely you must be a catch, right?

We’ll cover this theory in a bit more detail but just for clarity, the above was purely a joke – we don’t want to suggest speed match-making events are the best place to find partners and we most certainly don’t advise using using your education, job or wealth to brag your way into a relationship.

Once you’re done reading this and think pursuing an degree is aligned with your longer term objectives, consider learning more about why we think economics is one of the best options and what your Cambridge economics interview may feel like.

Your UK university economics personal statement and Oxbridge application done with you from start to finish.

In an age where knowledge has been made universally available, Chat GPT can answer almost any question thrown at it and no matter what the concept, you’ll find a YouTube video explaining it, why would you pay £35k+ and learn at a university? As unfortunate as it is to say, mainly because of the crisp 350 gsm printed certificate you get on your last day.

The Job Market Signalling theory is an economic concept developed by Michael Spence in his 1973 paper, “Job Market Signalling.” It offers an explanation for the role of education in the labour market, focusing on how individuals can use their educational credentials to signal their productivity, skills, and capabilities to potential employers.

At its core, the Job Market Signalling theory is based on the idea of information asymmetry between job seekers and employers. In the labour market, employers often have limited information about a candidate’s true abilities and productivity, while job seekers have more knowledge about their own skills and potential. This information gap creates uncertainty for employers when hiring new employees.

To address this uncertainty, job seekers can use education as a signal to differentiate themselves from other candidates. By acquiring degrees, diplomas, or certifications, individuals can demonstrate that they possess certain skills, knowledge, and abilities, making it easier for employers to evaluate their productivity and potential. In other words, educational credentials serve as a proxy for an individual’s innate abilities and characteristics.

The Job Market Signalling theory can be explained in a few key steps:

  1. Information asymmetry: Employers lack complete information about the true abilities and productivity of job seekers. Job seekers, on the other hand, have more knowledge about their own skills and potential.
  2. The role of education: To bridge this information gap, job seekers use education as a signal to convey their productivity, skills, and capabilities to potential employers.
  3. Credential acquisition: Job seekers invest time, effort, and resources into acquiring educational credentials (degrees, diplomas, certifications) to differentiate themselves from other candidates in the labour market.
  4. Employer evaluation: Employers use these educational credentials as a proxy for an individual’s potential productivity, which helps them reduce the uncertainty in the hiring process.
  5. Equilibrium: In the labour market, an equilibrium is reached where individuals with higher educational credentials are more likely to be hired and receive higher wages, as employers associate these credentials with greater productivity and capabilities.

Whilst there are critics of the Job Market Signalling theory that argue it may underestimate the value of the knowledge and skills that education provides, focusing too much on the role of education as a signal, we feel in today’s day and age it is certainly relevant. This is not to completely discount the knowledge and skills learnt, they do of course play a role, however most if not all economic theories only apply in generality; economics is not a natural science.

For this reason, we firmly take the view, if you want to study economics at university, it is most worth the time and effort if you study at a top-tier university where the power of your signal is most recognised by employers.

If you’d like support in writing your personal statement, preparing for your Oxbridge interview or your application in general, feel free to consider our consulting service.