Estimating the returns to education: Social returns versus
private returns: The signaling theory of education The general
idea is very simple. Suppose you have two types of workers,
whose productivities are 1 and 2. Employers cannot distinguish
the type-1 workers from the type-2 workers. So in the absence of
signaling, they just pay everyone the expected marginal product,
say, 1.5. Now assume that individuals can acquire education at a
cost. For the sake of argument assume education cannot improve
productivity whatsoever, and employers are aware of this. The
crucial assumption for signaling to arise is the "single-
crossing condition," which basically requires that it is less
costly for the more productive types to acquire education. One
can think of the type-2 workers are being smarter so that taking
exams or listening to lectures is less painful to them. Let's
say the cost of each year of schooling is 0.2 for the type-2
workers and 0.5 for the type-1 workers. A "separating
equilibrium" occurs when all type-2