Beyond Signaling and Human Capital: Education and the Revelation of Ability

In traditional signaling models, education provides a way for individuals to sort themselves by ability. Employers in turn use education to statistically discriminate, paying wages that reflect the average productivity of workers with the same given level of education. In this paper, we provide evidence that education (specifically, attending college) plays a much more direct role in revealing ability to the labor market. We use the NLSY79 to examine returns to ability early in careers; our results suggest that ability is observed nearly perfectly for college graduates but is revealed to the labor market much more gradually for high school graduates. As a result, from very beginning of the career, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially completely unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability. In particular, we find no racial differences in wages or returns to ability in the college labor market, but a 6-10 percent wage penalty for blacks (conditional on ability) in the high school market. These results are consistent with the notion that employers use race to statistically discriminate in the high school market but have no need to do so in the college market. That blacks face a wage penalty in the high school but not the college labor market also helps to explains why, conditional on ability, blacks are more likely to earn a college degree, a fact that has been documented in the literature but for which a full explanation has yet to emerge.

Essays on Urban and Labor Economics

<p>In the first chapter of this dissertation I develop a flexible and estimable equilibrium model that jointly considers location decisions of heterogeneous agents across space, and their optimal portfolio decisions. Merging continuous-time asset pricing with urban economics models, I find a unique sorting equilibrium and derive equilibrium house and asset prices in closed-form. Risk premia for homes depend on both aggregate and local idiosyncratic risks, and equilibrium returns for stocks depend on their correlation with city specific income and house price risk. In equilibrium, very risk-averse households do not locate in risky cities although they may have a high productivity match with those cities. I estimate a version of this model using house price and wage data at the metropolitan area level and provide estimates for risk premia for different cities. The estimated risk premia imply that homes are on average about 20000 cheaper than they would be if owners were risk-neutral. This estimate is over 100000 for volatile coastal cities. I simulate the model to study the effects of financial innovation on equilibrium outcomes. For reasonable parameters, creating assets that correlate with city-specific risks increase house prices by about 20% and productivity by about 10%. The average willingness to pay for completing markets per homeowner is between $10000 and$20000. Productivity is increased due to a unique channel: lowering the amount of non-insurable risk decreases the households' incentive to sort on these risks, which leads to a more efficient allocation of human capital in the economy.</p><p>The second chapter of this dissertation studies ability signaling in a model of employer learning and statistical discrimination. In traditional signaling models, education provides a way for individuals to sort themselves by ability. Employers in turn use education to statistically discriminate, paying wages that reflect the average productivity of workers with the same given level of education. In this chapter, we provide evidence that graduating from college plays a much more direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from very beginning of the career, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability. In particular, we find a 6-10 percent wage penalty for blacks (conditional on ability) in the high school market but a small positive black wage premium in the college labor market. These results are consistent with the notion that employers use race to statistically discriminate in the high school market but have no need to do so in the college market.</p>Dissertatio

Beyond Signaling and Human Capital: Education and the Revelation of Ability

We provide evidence that college graduation plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates, but is revealed to the labor market more gradually for high school graduates. Consequently, from the beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and returns to ability. (JEL D82, I21, I23, J24, J31)

Beyond Signaling and Human Capital: Education and the Revelation of Ability

We provide evidence that graduating from college plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from the very beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability.

Web Appendix: Beyond Signaling and Human Capital: Education and the Revelation of Ability

Appendix to working paper titled "Beyond Signaling and Human Capital: Education and the Revelation of Ability." In that paper, we provide evidence that graduating from college plays a direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from the very beginning of their careers, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability.

How resilient is mortgage credit supply? Evidence from the COVID-19 pandemic

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgagebacked securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment