Remuneration Of The Nerds, Or “Putting the $$ in LaTeX”

I’ve been thinking a lot about signaling lately. The central idea of signaling is hidden (or asymmetricinformation. A classic example of signaling is provided by education, or more specifically, “the degree.”

Suppose for the sake of argument that a degree is valuable in some intrinsic way: a college degree is arguably worth $1.3 million in additional lifetime earnings. (Let’s set aside for the moment the level of tuition, etc., that this estimate (if true) would justify in terms of direct costs of a college degree. I’ll come back to that below.)

Instead, let’s think about the basis of this (“market-based”) value.  A simple economic story is that the education & training acquired through obtaining the degree increase the marginal productivity of the individual by (say) $1.3M.  Well, I don’t even REMEMBER much of college (and probably thankfully…AMIRITE?), so this seems unlikely.

Another, more interesting (to me at least), explanation is that the value of the degree is through its signaling value.  There are a number of explanations consistent with this vague description, including

  1. College admissions officers are good (in admissions and the act of “allowing to graduate”) at selecting the “productive” from the “unproductive” future workers.  Maybe.  College admissions is hard, and I respect those who carry the load in this important endeavor.  But…
  2. Finishing college shows “stick-to-it-iveness” and thus filters the “hard workers” from the “lazy workers.”  Again, this is undoubtedly a little true.  But there are other ways to “work hard.”  So, finally…
  3. College does 1 & 2 and, to boot, adds a “selection cherry” on top.  In particular, the idea of the college major allows individuals to somewhat credibly demonstrate the type of work they find most appealing (controlling for market valuation, to which I return below).

Explanation 3, as you might expect, is the most interesting to me.  What am I thinking?  Well, back when I was a kid, going to law school was considered a hard, but not ULTIMATELY HARD way to score some serious dough in one’s first job.  Sure, it took some money, and some serious studying, but—HAVE YOU SEEN THOSE STARTING SALARIES?  HAVE YOU SEEN “THE FIRM”?  Oh, wait.  Wait…no, seriously…YOU CAN BE TOM CRUISE AND WIN IT ALL.

On the other hand, math (pure or applied) was considered a “very good, but…come on” kind of major.  In particular, a perception (not completely inaccurate) was that math was hard, but didn’t really “train/certify” you for any job other than, perhaps, being a math teacher.  But, this argument falls on its face after a bit of thought: you can be a math teacher without being a math major.  (I’m proof of this general concept, I am a “political science teacher” and was a math/econ double major.)  So, what gives?  Why would you be a math major?

Because you are intrinsically motivated (i.e., you “like math problems”).  In other words, you are signaling a true interest precisely because there are other, arguably easier, ways to get to the same moolah.  Which means that you’ve sent a (potentially costly) signal to potential employers that this is “what makes you tick.”  This is the information that your degree provides: you have shown them costly signals of what you actually like to “stay late” and work on.

The same argument goes for majors that are both demanding and relatively specialized, (e.g., petroleum engineering, actuarial sciences): employers can be more certain upon seeing such a degree that you really want a career in this—you like it (where “it” is the substance/drudgery of what the job entails).

In other words, to the degree (pun intended) that the value of college is just about selection (explanation 1), then admission to the “marginal school” (i.e., any school that admits every applicant) should be valueless (which I don’t think it is).  If the value of college were just about “showing you can finish something” (explanation 2), then the value of college would be no different/less than completing four years of (say) military or missionary service.  (And, maybe it is no different, but many people follow such admirable service by pursuing a college degree.)

Accordingly, the fundamental signaling value of a college degree is arguably not in its possession, but in the information contained about how it was obtained.  In other words, “the major.”  Of course, there are other, but in my mind ancillary, determinants of the value of a college degree.  As my Dad told me when I was growing up (which is kind of meta),

It isn’t all about the destination—half the fun is in “getting there.”

If that wasn’t true in terms of how one’s actions are interpreted, then one’s actions are even more easily interpretable.  Stew on that for a second.

Finally, in terms of the “math of politics” of this reasoning, note that costly signals are everywhere, and they are important far beyond college: legislative committee assignments, the development of reputations by “policy entrepreneurs” (I’m looking at you, Ron Paul, Ted Kennedy, & John McCain), the development of expertise/autonomy in bureaucracies/central banks, the emergence of “neutral independence” in judiciaries, and the credibility of “dying on the hill for a cause” necessary for policy bargaining by “fringe” political groups (see: Green Party, Pro-Choice/Life groups, PETA, Tea Party, Muslim Brotherhood, ACLU).  There are many, many applications of the notion that value is assigned by selectors (voters, employers, the unmarried) in signals that more precisely reveal hidden information about the tastes/predilections/goals of those vying for selection into potentially long-term, repeated relationships.

With that, I leave you with this.

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