The Signaling Value of a High School Diploma

Although economists acknowledge that various indicators of educational attainment (e.g., highest grade completed, credentials earned) might serve as signals of a worker’s productivity, the practical importance of education-based signaling is not clear. In this paper we estimate the signaling value of a high school diploma, the most commonly held credential in the U.S. To do so, we compare the earnings of workers that barely passed and barely failed high school exit exams, standardized tests that, in some states, students must pass to earn a high school diploma. Since these groups should, on average, look the same to firms (the only difference being that "barely passers" have a diploma while "barely failers" do not), this earnings comparison should identify the signaling value of the diploma. Using linked administrative data on earnings and education from two states that use high school exit exams (Florida and Texas), we estimate that a diploma has little effect on earnings. For both states, we can reject that individuals with a diploma earn eight percent more than otherwise-identical individuals without one; combining the state-specific estimates, we can reject signaling values larger than five or six percent. While these confidence intervals include economically important signaling values, they exclude both the raw earnings difference between workers with and without a diploma and the regression-adjusted estimates reported in the previous literature. ∗For useful discussions, we thank Kelly Bedard, Ken Chay, Mike Geruso, Marco Manacorda, Rob McMillan, Devah Pager, Craig Riddell and, especially, David Lee. For helpful comments and suggestions, we thank seminar participants at Bristol University, Brown University, Columbia University, the Florida Department of Education, Harvard University, London School of Economics, Northwestern University, Pompeu Fabra, Princeton University, RAND, Rutgers University, University of Toronto, UC Davis, UC Irvine, UC Santa Barbara, University of Florida, the SOLE 2010 conference, the NBER 2010 Summer Institute and the Southern California Conference of Applied Microeconomics (Claremont McKenna College). Clark thanks the Florida Department of Education for generously supplying the Florida data used in this paper and for providing invaluable information on the relevant institutions. Much of this work was completed while Clark was visiting the Industrial Relations Section at Princeton University. We thank Marion Aouad and Yu Xue for excellent research assistance. Financial support was generously provided by the U.S. Department of Education (under grant R305R060096). The opinions expressed in this paper are ours, and do not necessarily reflect the views of the Florida Department of Education, the Texas Department of Education or the U.S. Department of Education.