Signaling vs. Human Capital: Evidence from a Curriculum Reform at Colombia’s Top University

PWP-CCPR-2016-033

Abstract

In this paper I test whether the returns to college education are due to increases in productivity (human capital theory) or to the fact that attending college signals higher ability to employers. I exploit a reform at Universidad de los Andes, which in 2006 reduced the amount of coursework required to earn degrees in economics and business. The size of the entering class, their average high school exit exam scores, and graduation rates were not affected by the reform, indicating that the quantity and quality of students remained the same. Therefore, the reform decreased the human capital students graduate with, while holding the value of the education signal constant. Using administrative data on wages and college attendance, I find that wages fell by approximately 16% in economics and 12% in business. These results suggest that human capital plays an important role in the determination of wages, and reject a pure signaling model. Surveying employers, I find that the decline in wages may have resulted from a decline in performance during the recruitment process, which led to a smaller pool of jobs to choose from. Using data from the recruitment process for economists at the Central Bank of Colombia, I find that the reform reduced the probability of students from Los Andes from being hired by 17 pp.