The earnings gap between university-educated workers and non-graduates has been widening across the world, which has contributed to rising inequality. But why do employers value employees with college degrees more? A particular school of thought holds that employers prefer more educated candidates, not because their education is relevant to their work, but merely because it signals that the candidate is competent.

However, a new study by Carolina Arteaga of University of California Los Angeles (UCLA) disputes this theory and finds that employers value students for the skills they actually acquire in colleges and pay them more for that. Arteaga analysed the impact of curriculum reform that took place at the Economics and Business Departments of the Los Andes University of Colombia in 2006. The reforms reduced the number of classes required to earn a degree without changing the admissions criteria. Arteaga says that the reforms reduced coursework which meant that students graduated with less knowledge and skills, while the quality of students enrolled in the college remained the same.

Comparing wages of graduates before and after the reform and comparing them to wages of students from other colleges, where the curriculum remained the same, she found that wages for students from the reform college decreased by 16% in economics and 13% in business. Arteaga also found that a smaller share of students were hired at the highest-paying jobs.

She attributes this wage differential to the reduction in coursework, implying that skill building is important to determine wages and signalling is not the only role of college education.She confirms these findings through interviews with the largest employers who said that they actually value skills and specific knowledge taught in colleges, and design recruitment processes to identify students with these relevant skills.

READ | The effect of human capital on earnings: Evidence from a reform at Colombia’s top university

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