Signaling and Employer Learning with Instruments
This paper considers the use of instruments to identify and estimate private and social returns to education within a model of employer learning. What an instrument identifies depends on whether it is hidden from, or transparent (i.e., observed) to, the employers. A hidden instrument identifies private returns to education, and a transparent instrument identifies social returns to education. We use variation in compulsory schooling laws across non-central and central municipalities in Norway to construct hidden and transparent instruments. We estimate a private return of 7.9%, of which 70% is due to increased productivity and the remaining 30% is due to signaling.
We thank Thomas Lemieux, three anonymous referees, Peter Arcidiacono, Leora Friedberg, John Bodian Klopfer, Edwin Leuven, Emily Nix, John Pepper, and participants at the 2018 Cowles Conference in Honor of Joseph Altonji, 2019 Essen Health Conference and seminar participants at University of Bergen, Ohio State University, Norges Bank, University of Southern California, University of Calgary, Goethe University Frankfurt, University of Alberta, University of British Columbia, University of Sussex, University of Delaware, University of Waterloo, University of Rochester, London School of Economics, Frisch Centre for Economic Research, Tinbergen Institute, Harris School of Public Policy and Georgetown University for helpful comments and suggestions. This project received generous financial support from the Research Council of Norway through grants 194339, 250516, 267428 and 275123, the Social Science and Humanities Research Council of Canada and the Canada Research Chair program. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Gaurab Aryal & Manudeep Bhuller & Fabian Lange, 2022. "Signaling and Employer Learning with Instruments," American Economic Review, vol 112(5), pages 1669-1702.