Reasons for student employment: Education signaling upside down

Alexander Apokin (EcFor RAS, CMASF, Moscow)Maria Yudkevich (SU-HSE, Moscow)

September 12, 2009

Plan

General idea and motivation Previous studies of student employment Model Results Empirical evidence Conclusions

General idea and motivation Considerable growth of student employment in European

countries and US In Russia, trends seem alike (around 50% in 2006)

However: Almost all high-school graduates are enrolled in

university programs Students with better academic achievements start to

work earlier Income is not always the first reason for seeking job

Research question

Why in Russia students with better academic achievements start to work earlier?

Why important? Around 40% of 3rd year students work Around 90% have job at the moment of graduation Average workload: 22 hours per week

Data: Monitoring of Russian Education (2007)

Do classical explanations help?

Human Capital Theory

Signaling Theory

Education increases productivity

Education doesn’t affect productivity, works as signal

Smart people get more education

Our intuition If Educational standards are weak (little effort is needed to

get a diploma) and Employers’ do not trust a formal education and believe that

“real experience is far more important than grades”

Then Education is not a signal any more High-ability students may choose to combine studies with

work to signal their ability while sacrificing the quality of education

Studies on student employment: main issues

Reasons for employment Financial needs and new instruments of financing (Callender and Kempson

(1996), Kelly (1996), Ford (1995)) Social factors (Lucas and Lammont (1998)), Curtis and Lucas (2001), Hodgson

and Spours (2001))

Impact on academic consequences General (Curtis and Shani (2002), Sorensen and Winn (1993) Academic attainment (Hunt et al (2004), Paul (1982), Kalenkovski (1994)) Drop-out rates (Callender and Kempson (1996), Hesketh (1996))

Working loads and work structure UK (Ford et al (1995), Curtis and Lucas (2001)), Canada and US (Hakim (1996),

Myles at al (1993))

Future employment prospects and career Harvey et al (1998), Hodgson and Spours (2001), Ruhm (1997) Little attention to school-to-work transition (Harkonen (2001), Roshchin (2006))

Model

Dynamic game between students, employers and (in extended setup) universities

Universities: costly educational programs Students: different abilities {θl ;θh} with probs

{λ;1- λ} Ability is a private information Choice between “only studies” and “studies + job” Education is only productive if not combined with job Work experience reveals ability with certainty

Employers: employment contracts, Bertrand competition

Timing

1. Agent realizes her type and enters the university.

2. The agent decides whether to combine studies with job. If she chooses to work, there is no positive effect from education in the future (and no cost), but the work experience provides a given amount of learning-by-doing increase in productivity L.

3. If the agent chooses to devote all her efforts to studies, a fixed amount of education e is obtained at the cost c (e, θ). At the end of the period, agent graduates and leaves current job in search for a full-time employment.

4. The agent meets new employer and either signals her education e or shows the type. Employers offer contracts w(s), s belongs to {e;L}.

5. The agent accepts or rejects either contract and in the former case produces F(s, θ).

Equilibria: modified Spence – Mirrlees condition

University freshmen compare w(0) + w(L) and w(e) – c (e, θ) at stage 2.

Let us define c (e, θl) – c (e, θh) = – Δθc (e, θ), and

F(0,L, θh) – F(0,L, θl) = Δθ F(0,L,θ). Then

Extended setup: educational policy

We interpret as a quality of student grading ― an educational policy parameter under control of the university

Better grading → higher costs of best grade → allow separation of types

However: rigorous grading is costly, as it consumes more effort.

Extended setup: continuous case

The case of continuous type allows to model “bizarre” equilibria as a generaized case of countersignalling problem (Feltovich, Harbaugh and To (2002)) contingent on poor student grading quality or exceptional return on productivity of more able students

Student strategy choice rule, stays the same, while equilibrium conditions change. Specifically, the conditions for countersignalling arise:

Extended setup: continuous case

Depicting the choice rule and countersignalling equilibrium in a numeric example:

Extended setup: continuous case

For values of e=4,43 and L=12 the equilibrium will look like this (LHS and RHS refer to the choice rule, )

0.367 0.996

12

15

18

21

24

27

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

LHS RHS

Results Different equilibria are possible depending on university

education standards (in regard to effort requirements)

Absence of rigorous education standards and substantial cost of creating individual reputation → universities decrease their effort requirements for graduation → education quality decreases

Employers are aware of this and do not “trust” formal education and consider students with no working experience during studies as inferior ones

In case of low university requirements “bizarre” equilibria with high-type agents working part-time arise

Data

Economics of Education Survey (Higher School of Economics in cooperation with Public Opinion Foundation and Levada-Center under support of Ministry of Education and Science) (since 2002)

Round 2006-2007: Students (2092) Employers (1035) University and college faculty (1374) University administration (over 400)

Russian evidenceTable 1. Major field of study and employment during studies

Major field of studyAverage Working Hours

per WeekObservations

Social sciences (Economics, law, management, sociology)

22.9 45

Foreign languages 11.3 4

Philosophy, history, philology etc. 22.2 9

Math, programming 17.6 10

Natural sciences (physics, chemistry, biology etc.) 29.4 7

Technical sciences (engineering, construction, technology)

20.1 27

Medicine 27.7 17

Pedagogies 12.0 5

Culturology, Arts, Architecture 12.2 43

Table 2. Employers’ view on the importance of applicant perks

Factor Mean Std. Deviation

University reputation/ranking 3.6 1.2

The courses the applicant have taken 2.9 1.3

Grades 2.8 1.3

Recommendations/references 3.9 1.1

Previous work experience by the work-book 4.2 0.9

Russian evidence

Table 3. Students’ preferences and beliefs about importance of diploma

Status Observations Mean Std. Deviation

Never had an employment 1067 3.6 1.3

Had a previous employment 1019 3.4 1.3

Russian evidence

Table 4. Workloads and employment-major relationship

Work is related to the field of studies Overall

Whole sample 18.3 21.2

First three years of study

16.2 17.1

Table 5. Lecture attendance and employment

Non-working students

Work is related to the field of studies

Overall

Whole sample 28.7 25.3 27.9

First three years of study

28.6 26.2 28.2

Table 6. Regular study efforts and employment

Non-working students

Work is related to the field of studies

Overall

Whole sample 13.4 13.6 12.8

First three years of study

13.4 14.8 13.2

Conclusions and policy implications Lack of funding for higher education creates incentives for universities to

economize on education which makes early employment more attractive for the sake of signaling.

Talented students combining job and studies support low quality of education hypothesis. Employers believe in ability of talented students to combine successful studies with job.

Employers’ beliefs are more than just an element of the equilibrium in the model. In case of multiple equilibria a shift in employers’ beliefs can change equilibrium and thus amount of education each type will obtain. This suggests that employer beliefs are a powerful educational policy tool.

Rigorously enforced educational standards could set effort requirement at some minimal level and, in perspective, change the equilibrium to set the signaling role of the education superior of that to job experience.

Household expenses on higher education of children (in rubles)