Economics of Education Review 18 1999 133–141
What Do Educational Credentials Signal and Why Do Employers Value Credentials?
Jeremy Arkes
The CNA Corporation, 4401 Ford Avenue, Alexandria, VA 22302-8268, USA Received 7 June 1996; accepted 9 September 1997
Abstract
This paper examines whether employers can infer information about workers’ pre-college abilities from the college credentials they acquire and whether employers value the attainment of credentials because credentials signal these
abilities. I find that a high school diploma, college attendance, a bachelor’s degree and a graduate degree signal higher pre-college abilities that are reflected in scores from tests administered to respondents in the NLSY. However, an
associate’s degree does not. Estimating a sorting model of wage determination, the results indicate that employers do value the attainment of a bachelor’s degree in part because it signals these pre-college abilities. The coefficient estimates
on an associate’s degree and a bachelor’s degree remain statistically significant after controlling for ability. This indi- cates that these degrees mark other attributes that employers find worthwhile, perhaps unobserved ability such as
motivation and perseverance. [JEL J31]
1998 Elsevier Science Ltd. All rights reserved.
1. Introduction
In most European and Asian countries, high school students take national achievement tests, which are often
used for college admission and job screening. While such tests are not used in the United States for job screening,
employers before 1971 often administered their own achievement tests, but the 1971 Supreme Court decision
in Griggs vs Duke Power Company
1
held that employers who base hiring decisions on such achievement tests for
which minorities or women perform worse than white males must prove that test scores are related to job per-
formance for all groups of workers. This decision essen- tially made the use of intelligence tests too costly for
most small- and medium-sized firms Bishop, 1992.
2
In
1
401 U.S. 424.
2
In the 1989 decision for Wards Cove Packing Co. vs Antonio 490 U.S. 642, the Supreme Court increased the bur-
den on the plaintiff the adversely affected worker or job applicant and decreased the burden on the defendant the
employer. Still, the potential for a lawsuit remained.
0272-775798 - see front matter
1998 Elsevier Science Ltd. All rights reserved. PII: S 0 2 7 2 - 7 7 5 7 9 8 0 0 0 2 4 - 7
place of such tests, employers can make inferences about workers’ abilities by noticing associations for experi-
enced workers between educational attainment and the abilities that they would normally measure with intelli-
gence tests. Thus, employers may hire and pay higher wages to more educated workers not only because edu-
cation makes workers more productive, but also because education signals certain traits or abilities that employers
find worthwhile.
The objectives of this paper are to determine whether employers can learn about workers’ pre-college cogni-
tive abilities by observing the educational credentials they obtain, and to assess whether employers value cre-
dentials because they signal these cognitive abilities. If we find that employers do value credentials for signaling
certain cognitive abilities, then a national test measuring these abilities — preferably one that is racially
unbiased — may, in some cases, be an efficient substitute for the current high private and social costs incurred
as a result of individuals acquiring credentials once they have attained the skills necessary for the labor market.
In addition, such a result may call for a re-examination
134 J. Arkes Economics of Education Review 18 1999 133–141
of the policies that make it difficult for employers to administer ability tests to prospective employees.
One other contribution of this paper is that it identifies another educational credential not ordinarily considered
as one, namely college attendance. By attending college, a person arguably displays the motivation to learn and
to improve himself, thereby distinguishing himself from someone who only acquires a high school diploma. In
addition, it may show that some institution that may have access to his cognitive ability test scores has deemed this
person capable of completing its academic program.
For an ability measure, I use the Armed Forces Quali- fication Test, which was administered to the respondents
in the National Longitudinal Survey of Youth NLSY. The test measures a wide range of abilities. It is
important in sorting models to consider pre-existing abilities or pre-college abilities in this case. Otherwise,
it would be difficult to separate the abilities signaled by college from the productive skills acquired in college.
Thus, I consider a sample from the NLSY of respondents who were no older than 18 and had not attended college
at the time they took the ability test. The results show statistically significant partial associations between pre-
college ability and a high school diploma, college attend- ance, a bachelor’s degree and an advanced degree, but
not an associate’s degree.
Given that
credentials signal
certain abilities,
employers should value the attainment of credentials based on how much new information is conveyed by cre-
dentials about workers’ abilities and how much they value the abilities. For instance, suppose that a bach-
elor’s degree signals three traits: competent mathemat- ical abilities, high motivation and good memory.
Employers may value only mathematical abilities and motivation. Furthermore, employers may already have an
adequate sense of the worker’s mathematical abilities by observing school transcripts. Thus, even though a bach-
elor’s degree may signal good memory and high math- ematical abilities, employers would value the degree
because it signals motivation, and not because it signals the other traits.
To determine the extent to which employers value the attainment of credentials for signaling pre-college abili-
ties, I take it as given that firms reward educational attainment in part because a higher education signals
qualities that are initially unobservable to employers and that indicate greater productivity. Thus, I employ a sort-
ing model of wage determination, which allows edu- cation to have an effect on productivity, as well as serv-
ing as a signal of pre-existing ability Weiss, 1995. The results suggest that employers value and reward a bach-
elor’s degree in part because it signals abilities reflected in the pre-college ability scores. Results for the other
credentials are inconclusive due to large standard errors.
2. Previous work and a new interpretation of wage premiums for credentials
