One of the most interesting questions in social science is the extent to which education improves cognitive abilities. There is growing evidence that, especially for disadvantaged kids, early childhood education improves noncognitive skills that are key to future success. And obviously, there is no question that basic education (verbal and mathematical literacy and the like) is essential to functioning in today's world. In addition, specialized education clearly is necessary to enter into the trades and many technical fields and other professions.
But to what extent does, say, a college education really improvecognitive ability, such as basic math and verbal skills? Economics hastwo basic theories about this. The most widely accepted view comes fromhuman capital theory, a school of thought developed by Gary Becker, the Nobel Prize-winning economist. Human capital refers to the education and training embodied in an individual. The idea is that the knowledge and skills you have are the equivalent of a productive stock of capital. Those skills generate increased income in the future, in the form of wages you get from your employer. Many economists believe that higher education increases your human capital, and the resulting increase in your productivity as a worker will translate into higher wages. There is also evidence that increased human capital is associated with other positive outcomes besides earnings, include better health and higher rates of political participation.
Another school of thought says that education may notactually increase human capital, but could merely serve as a signal asto your productivity. In this model, as theorized by the NobelPrize-winning economist Michael Spence, labor markets are confronted with the problem of asymmetric information. Specifically, a worker knows his or her productivity, but an employer does not. The degree of education a person obtains is a signal as to his or her productivity. The idea is that education is costly to obtain, and that for low productivity workers it is costlier to obtain than it is for high productivity workers, because for the low productivity group it requires more effort.
Therefore, if an employee gets an education, it's a signal that heor she has high productivity -- otherwise the costs of getting aneducation would be higher than the benefits. Employers will respond tothe signal by paying the educated workers a high wage and theuneducated workers a low wage. A crucial feature of this model is thateducation need not increase productivity. The model will work so longas education acts as a signal and employers pay wages that areincentive-compatible (so that it's worth it for high-productivitypeople to get an education, but it's not worth it for low-productivitypeople).
