The Great LSE?

nauru
Thu, 26 Apr 2007 18:39:23 +0000

Icblatnik- we were just talking about this issue today in class, albeit in more general terms. Your question is a nice real world example of the contrast between human capital theory and the screening hypothesis.

Human capital theory: Education adds to the human capital of the individual, making him or her more productive in his or her future work. The resulting higher productivity allows the worker to command a higher wage.

The screening hypothesis: Education does not make the individual significantly more productive, but rather acts as a signal to employers that the person is smart enough to learn and be good at the assigned job. The academic qualification thus acts as a certification of ability to learn, allowing the worker to command a higher wage.

If you believe in human capital theory, you should go to Michigan because you will learn more, thus adding more to your human capital, which will make you more productive in your future work and allow you to command a higher wage.

If you believe in the screening hypothesis, you should go to LSE because the perceived selectivity of the school sends a more powerful signal than does Michigan. The LSE certification of ability to learn will allow you to command a higher wage even though you will be no more productive as a result of having attended.

Which one is right? It isn’t clear. My take is that in certain fields, such as engineering, education does lead to higher productivity. In other fields such as finance, it doesn’t; education is used as signal more than anything else, which would explain why firms are willing to entrust millions of dollars in assets to Harvard graduates, even if that person’s degree was in a totally unrelated subject that requires a completely different skill set.