Around this time every year, one begins to notice a marked shift in the attitude of students everywhere. Following a gruelling period of studying and exams, we emerge from our rooms, battle-scarred yet relieved. Summer, once hopelessly distant, is now within our grasp.
Some of what we have learned and, by now, no doubt forgotten, may seem just a bit impractical. It is true that outside very specific career paths, it is highly unlikely many of us will have to identify the production quantity at which a natural monopoly achieves allocative efficiency. (It’s where price is equal to marginal cost, for anyone wondering.)
Why, then, do we work so hard to learn material we may never use again? There is, of course, a deep satisfaction that comes with learning. Apart from that, there is a fundamental economic concept at play.
Whether consciously or not, all of us taking APs, IBs, DSEs, or another one of the alphabet soup of tests, are involved in what economists call signalling.
A “signal”, in the economic sense, is credible information that one party transfers, about itself, to another. The concept was developed by Nobel Prize-winning economist Michael Spence, who formulated a model for signalling in the job market.
Spence noted that asymmetric information exists in the labour market. In other words, prospective employers do not have perfect information about job applicants. Faced with a line-up of nearly identical individuals, it is impossible for an employer to determine who has most ability.
This is where signalling comes in. A job applicant can convey a piece of relevant information, a signal, to the prospective employer to demonstrate his or her ability. Education is one such signal. For the signal to be effective, the employer must be able to establish that there is a strong correlation between high levels of education and high levels of ability in the workplace.
The key in this model is that the education attained does not need to have any practical value in the job. Instead, the mere fact that one has achieved a certain standard of education is enough.
It is obvious that a computer science degree is a reliable signal that one can perform well in a computer-related career. What is more interesting about signalling is that even having a degree in an unrelated subject shows a certain standard of performance.
As we take exams and join extracurricular activities, we too are signalling. In our case, most of us are signalling to universities that we have the skills, such as tenacity, intellectual ability and curiosity, that are required to succeed.
It is worth noting, however, that in today’s competitive world, the costs of signalling are rising. For example, no longer does an ordinary bachelor’s degree serve as an effective signal of competence. With tertiary education becoming incredibly common, a degree is conveying less and less useful information to employers.
Nevertheless, the next time you find yourself struggling through difficult but seemingly “pointless” work, do rest assured – your efforts will not go unrecognised.