What's the Real Value of an Education?

Ilya Somin has a long, thoughtful post on whether higher education has intrinsic value--i.e., it actually makes those who go through it into better workers--or whether it's mostly a signalling mechanism, which is to say that it allows students to signal the innate qualities which will make them good employees.

I'm basically a proponent of the signalling model, but over the past few weeks, Somin and others have made a persuasive case for at least a mixed model of how education works--part signal, part actual added value.

I wonder, though, if the case against signalling doesn't rest too heavily on the fact that college education is a very inefficient signal.  The argument goes something like this:  four years of college is an inefficient signal; there will be huge returns to companies that can find an alternative signal; therefore, the fact that they haven't suggests that it must serve some function beyond signalling.

That's very possible, but it does have a bit of the flavor of the old joke:  two economists are walking down the street and spy a $100 bill.  As one of them leans down to pick it up, the other says, "Don't bother.  If there were really a $100 bill there, someone would already have picked it up."

I can certainly think of some other possibilities:

1)  Inefficiencies are not always instantly corrected by the market.  Maybe the correction of this inefficiency simply hasn't happened yet.

2)  There's a coordination problem, which means we may simply be stuck in a bad equilibrium.  In a world with anything short of lifetime employment, it doesn't do a would-be success any good simply to find one employer who uses an alternate signalling mechanism, which may make him unwilling to risk skipping college.  Conversely, an employer willing to reward an alternate signalling mechanism first needs to find a bunch of conscientious, high-IQ kids with middle-class social capital who have skipped college to participate in this alternate mechanism.  To a first approximation, there may not be any, much less a steady stream.  And he can't recruit older workers who used an alternate signalling mechanism unless other employers also join him in eschewing the bachelor's.

3)  Relatedly, if what employers are looking for is a certain level of group conformity and respect for authority, well, those are precisely the last people who will skip the traditional signalling mechanism. (As evidence that employers are looking for these traits: military service is almost always a plus for an employer.)

4)  The valuable additional function that colleges supply may not be education; it may simply be babysitting people until they are, on average, mature enough to handle working in a modern office.

To that I would add this observation:  the market for a college education tracks the "signalling" model much better than the "valuable skills" model.  Consider these points, in addition to the oft-made observation that post-college work usually employs none of the information you learned in college:

1)  Virtually none of the employees in a college are selected for their ability to impart any sort of skills to undergraduates

2)  The perceived excellence of a college, on both student and employer sides, is much more closely linked to the exclusivity of its admissions process than to anything that looks remotely like an increase in the aggregate skill of its undergraduates

3)  The price spikes over the last few decades are hard to explain in terms of skills; why aren't new entrants into the market competing those prices back down?  It's hard to formulate an answer that doesn't come back to some sort of signalling.