The Sheepskin Effect

Previously: The Case Against EducationThe Case Against Education: FoundationsThe Case Against Education: Splitting the Education Premium Pie and Considering IQ

Epistemic Status: The spirit of Local Validity as a Key to Sanity and Civilization

The sheepskin effect is that completing the last year of high school, college or graduate school is much more profitable than completing any of the previous years, rivaling those other years combined. Employers seem to be paying for the degree (aka the sheepskin, which it’s printed on) rather than the human capital being built over time.

In the education chapter of Book Review: The Elephant in the Brain, I noted Robin relied on the sheepskin effect as strong evidence (along with other arguments, including impacts on national vs. personal income) that school was mostly signaling. Bryan Caplan does the same. He cites the data, seeing (on top of a 10% bonus in pay per year of school) 32% bonus pay for finishing high school, 10% for junior college, 30% for a bachelor’s degree and 18% for a masters. To those who claim this is mostly ability bias, he replies:

Ability bias explanations for sheepskin effects aren’t just hard to square with statistical evidence; they’re hard to square with the glaring fact that education spikes in degree years. If the labor market ignores credentials, why do so many college grads opt for zero graduate education? Are we supposed to believe one-third of the population has exactly the right ability to finish high school, but not advance to college? One-seventh has exactly the right ability to finish college, but not advance to graduate school?

To debunk sheepskin effects, correcting for these neglected abilities would have to drastically cut the payoff for degrees but not the payoff for years of schooling. What abilities would even conceivably qualify?

This seems like a straw man; no one thinks the labor market ignores credentials, so it’s easy to see why students act the way they do. Not only is not finishing high school severely punished as such (as the numbers show), not trying is at least sort of illegal. In addition, there’s a huge barrier to getting into college or graduate school, and large costs involved in starting, often involving relocation. Also, much of college is about being ready for the rest of college, and the early part of graduate school is largely to get you ready for the later parts.

I also notice, looking again, another instance of the mistake of assuming people are maximizing. We are definitely not supposed to believe that because a lot of people do something, it was right for them!

Having dismissed ability bias here, he then reasons:

After digesting all the evidence on the sheepskin effect, you may feel ready to channel King Solomon. Human capital and signaling come before you as litigants. They ask you to split the education premium between them. A ruling with a great ring to it: “Human capital gets credit for the payoff for years of education; signaling gets credit for the payoff for degrees.” This implies a human capital/signaling split of roughly 60/40 for high school, 40/60 for college.

Yet on reflection the Solomonic ruling treats human capital too generously. The sheepskin effect doesn’t measure signaling. Instead, the sheepskin effect sets a lower bound on signaling.

To see why, picture a world that lacks the notion of “graduation.” Can we safely declare educational signaling would vanish in such a world? Of course not.

What I wrote back in my previous review of Elephant in the Brain:

One note I would make is about the sheepskin effect, where the last year of a college degree is much more valuable than previous years. There’s been some debate about this online lately between Bryan Caplan and Noah Smith. I agree that this is largely a signaling effect, with ‘completed all eight terms’ much more impressive than ‘completed seven of eight terms’ since you don’t know how many more terms the first student could have finished if necessary.

What the discussion misses, it seems to me, is that only after graduation do you know that the first three years were real. It is easy to become ‘a senior’ through completion of a number of credits, saving the stuff they find hardest for last or even being in terrible shape to match up with graduation requirements. I strongly suspect that a lot of people who drop out in year four are much farther from finished than they would have you believe.

I’d like to expand upon that, because this effect seems huge but remains almost always unmentioned.

I’ll start with a real example.

I have a learning disability that makes it very difficult to learn foreign languages. This was bad enough to nuke my average in high school, despite having studied the same language (Hebrew) for most of a decade whether I wanted to or not (I’ve held on to maybe a hundred words?), and in college things threatened to get much worse. My college demands four terms of a single foreign language. I chose what appeared to be the easiest one for an English speaker, Italian. While it would be cool to speak Italian, I didn’t choose it for how much cooler it would make vacations and restaurants – I was fully aware that Italian was of little use. But I was desperate to get through this, ideally without my average being nuked again, and if it was marginally easier than Spanish but only 10% as useful, then Italian it would be.

When the term ended, I had spent the majority of my studying time on Italian I, and still (just barely) failed by the numbers. I managed to get the grade changed from an F to a D by promising not to take Italian II. I then managed to find a psychologist who vouched for my disability, I think on the basis of an IQ test combined with my history of failures – there really was no other explanation. So I was granted an exception, and allowed to take Asian literature (which I quite enjoyed) and Etymology (which was boring as hell but not hard) instead of the remaining three terms. The D still ended any hopes of my getting honors and crippled any hopes of a top graduate school, and after that I stopped trying that hard to get As, but I got to graduate.

Without that exception, would I have graduated? My guess is yes, because my family and I would have taken epic measures to make it work. I’d have taken a year off to live in Italy (or Israel) if I’d had to. But I can’t be sure it would have been enough.

A good friend of mine ran into this exact problem with the same requirement, couldn’t get the waiver, has no other remaining requirements, and will probably never graduate.

More data. My mother is a professor at Columbia University, where she is in charge of undergraduate biology education. One cool effect of this is that she’d bring related dilemmas and puzzles home so we could explore them at dinner. I helped her plan exam strategies, deal with discipline issues and so on, and it was both great fun and an actual education in the way that school isn’t. 

Occasionally we looked at a series of students who wanted to graduate with a major in biology. The problem was that their transcripts were, shall we say, not so flattering. They’d ‘completed’ close to the full eight terms, but did they have a high enough average in their major? Were the poor grades (Ds and sometimes Cs) in some required courses not acceptable? We all, including the school, wanted to let students graduate when we could – that’s the business, after all, and no one wants to ruin a kid’s life – but the degree has to mean something. These were many of the students who ‘complete seven of eight terms,’ and many others were those who knew a version of this examination was coming and they wouldn’t pass.

Countless others, no doubt, simply saved all the hardest and most difficult courses for the end, possibly in a way that made the logistics impossible to solve. And, well, whoops.

If I give you eight chess puzzles to solve, and you solve seven of them, that’s a lot less impressive than if you solve all eight. If I give you thirty-two courses in ten different fields of study with varying difficulty, and you choose your order so as to solve and pass the first twenty-eight, you are not remotely 7/8ths done.

I could thus tell a human capital story, or an ability bias story, for the sheepskin effect. The final test is real, so if you built up real human capital, and learned how to learn things and remembered your lessons and persevere when the going gets tough, and all that, you win out. If you didn’t do that stuff, you fail at the end when you can’t hide it any longer. Or, for ability bias, only at the end do we learn who had the right stuff all along; same principle. If the final test is sufficiently ‘more real’ than the others, that bonus at the end makes perfect sense.

Thus, I don’t think the arguments from sheepskin are as strong as many think they are. I do think that the education premium is mostly signaling and ability bias, including (but far from limited to) the sheepskin effect. And I do think Bryan offers other much stronger evidence, such as the fact that anyone could walk into any college class and take it for free sans the degree, and actual no one ever does. But I don’t think the sheepskin effect puts a lower bound on the signaling share, or offers that much evidence, because in a world without signaling you’d see it anyway, and I’m curious how Bryan would respond.


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9 Responses to The Sheepskin Effect

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  2. Peter Gerdes says:

    But your example kinda makes the opposite point doesn’t it? I mean to the extent that demonstrating ability in a foreign language was actually relevant to job performance you should expect employers to look at college transcripts and check to make sure that they aren’t hiring people like you who got exemptions to their foreign language requirements. They don’t because they don’t care at all about your foreign language ability in most cases.

    More generally, it seems implausible that employers care about whether or not you are good at a wide range of college courses. If your job doesn’t require foreign language skills, or lab skills or name the requirement they don’t care at all about how you perform at it. Indeed, this is clear from the fact that many schools don’t have these requirements yet, provided they are equally prestigious, diplomas from them are treated with the same value.

    The fact that students might have saved the courses *THEY* find hardest for last isn’t really relevant to arguing against the sheepskin effect unless those courses actually measures skills the employer cares about.

    • TheZvi says:

      The transcripts are a more clean example, I admit. The language thing is what happened to me, so felt right to include it, and it tells a strong ability bias story.

      So the question is, is there a link between hard courses or good grades, for a given person, and building human capital? I can see your argument that there isn’t. If you assert human capital as bunk to begin with, of course, it’s moot.

      Thinking back on it, the example of an isolated BS course isn’t the best. Fair. But when the final course is a 4000 level in your major, or your GPA in general or in major is the issue or what not, the connection seems more clear. In general it’s just much easier to get ‘3 years’ done and avoid having to do real work. If college does build real human capital, what’s the mechabism? Most of the more plausible ones seem to me to fit the story.

    • TheZvi says:

      Having slept on it, I’d say three things more:

      First of all, to the extent that one does learn things in school, one of the most important (real) lessons is how to get the job done even when it’s not your thing and it’s hard and it doesn’t seem to have a point other than it’s been demanded. That’s a life skill (that cuts both ways, but a life skill).

      Second, classes frequently build on each other. That’s the whole idea. There’s a huge difference between passing Italian I, and passing it in a way that lets you pass Italian II, and a way that actually lets you get through Italian IV (especially without wrecking your GPA doing it). You can cram for anything, so the test of something is whether or not you can build upon and use it later. Not having to complete all the requirements makes this very easy to dodge.

      And finally, I wish I had human-capital building examples from my own school experience, but I simply don’t, because it never came up – which is of course itself an argument against the human capital hypothesis, but I’ve more than admitted that already.

  3. Quixote says:

    Just wanted to note that I’m very sympathetic to your language issue. I don’t know if it rises to the level of a learning disability with me, but I’ve always has a hard time with languages to the point where I needed to work much harder than everyone else just to produce mediocre results (mid 80s). And it’s probably genetic, my mother failed French five separate times in college and ultimately had to graduate with a BS instead of a BA because of that. Mindful of my mother’s problem and my own, I used “is there a mandatory language requirement” as a hard filter on which colleges I applied to

    • Thank you, I appreciate it, and very wise tactic. I used that filter for my *other* applications, but when you have a tuition exemption and a way into an Ivy, and the best place you get into otherwise is NYU due to transcript issues (e.g. the language issue, how ironic) you assume you’ll figure something out and take the better rep and $120k. Which is what happened.

  4. JohnBuridan says:

    Thanks for the article, Zvi. I would like to know more about your language learning. Were there particulary strategies that you thought worked for you? Was Hebrew language education grammar and vocab focused or reading intensive or spoken frequently? Some combination?

    • It was a mix of spoken, grammer and vocab depending on the year – I actually had a full 9 (!!!) years of it, K-6 and again 10-11, plus things like ‘Jewish life’, some Talmud and doing my bar mitzvah torah reading for real (which I did ace after much misery). I peaked at ‘pass the regents with an actually reasonable score in the high 80s but I have no idea how I did that and I forgot it all quickly.’ Which at the time I wasn’t upset about, now it makes me sad. At home, my parents would speak hebrew when they didn’t want the kids to understand them, but never made an attempt to speak it to us much. Due to various issues, speaking was especially hard for me.

      What actually worked? Nothing worked well, obviously, but I’d say rote memorization was the only thing that did anything at all, especially for vocab. And it felt like vocab was the key to everything else, but it always went super slow, and there was zero way to keep up with a class at the level of institution I’d be at otherwise. A little grammar and a little vocab still stuck, but very little. I’d try again if I thought I had a good path to getting there, now that I’m old enough to appreciate it.

  5. Pingback: Book Review: The Case Against Education – Postlibertarian

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