This paper incorporates an education signaling mechanism into a dynamic model of production and asks if “higher education as a signal” helps explain the simultaneous increase in the supply and price of skilled relative to unskilled labor in the United States since 1980. The key mechanism is that if college degrees serve as a signal of unobservable talent and talent is productive at the workplace, then improved access to college will enable a higher fraction of the population to signal talent by completing college, resulting in degrees being a better signal about talent and a widening skill premium. When I assess the contribution of signaling in the model calibrated to the US economy from 1980 to 2003, I find that about 10% of the increase in the skill premium can be attributed to the signaling mechanism, after adjusting for the potential decline in the quality of college graduates.

We use the United Kingdom Labour Force Survey to estimate the returns to schooling and job-specific experience in sixteen different industry sectors over the period 1994-2001. Next, assuming skill levels are fixed, we assess the marginal effect on these returns of the capital intensity of production and the ICT intensity of capital. Our results indicate that in the UK, over the period 1994-2001, the rising ICT intensity of capital was associated with a rise in the return to schooling, and a reduction in the return to job-specific experience.