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April 24, 2015

The Changing World of Work: The Eroding Value of Credentials

By Charles Hugh Smith, OfTwoMinds
(EconMatters Note: This is part 4 of the 5-part series, check out part 1 to 3 here )

An entire new feedback loop of accreditation is needed, and fortunately that feedback is within our control: it's a process I call accredit yourself.

Economist Michael Spence developed the job market signaling model of valuing employees based on their credentials in the 1970s. The basic idea is that signaling overcomes the inherent asymmetry of information between employer and potential employee, i.e. what skills the employer needs and what skills the employee actually has is a mystery to the other party.

Credentials (diplomas, certificates, grad point averages, test scores, etc.) send a signal that transfers information to the employer about the opportunity cost the potential employee sacrificed for the credential. 

It is important to note that the credential doesn't necessarily signal the employee's actual skills or knowledge-- it only signals the amount of human and financial capital the employee and his family invested in obtaining the credential.

Signaling boils down to something like this: if Potential Employee A graduated from a prestigious Ivy League university, and Potential Employee B graduated from a lower-ranked state university, this doesn't signal that Candidate A is necessarily more intelligent than Candidate B; it does signal, however, that Candidate A probably worked harder to get into and graduate from the prestigious school.

The signal is: Candidate A will work harder for the employer than Candidate B, all other qualifications being equal.

The Signal Value of credentials is the entire foundation of higher education. The higher education system does not actually test or credential the body of knowledge or working skills of graduates; it simply accredits that the graduate sat through a semi-random selection of courses and managed to pass the minimal standards--or alternatively, that the graduate gamed/cheated the system to gain credit without actually doing any real learning.

The reason tens of thousands of parents are sweating blood to get their child into an Ivy League university is the signaling power of that degree is widely viewed as having the near-magical ability to guarantee lifelong highly compensated employment.

But the power of higher education credentials is eroding for systemic reasons.

1. Credentials of all sorts are in over-supply: there are more people holding credentials than there are jobs that require those credentials.
2. Higher education does not prepare graduates for the real world of work in the emerging economy, so the signaling value of a diploma has been lost.
3. The opportunity cost paid by those graduating from college is now more noise than signal.
4. The intrinsically ambiguous signal value of a credential cannot be substituted for real-world accreditation of real skills and working knowledge.

In essence, the failure of signaling to accredit actual skills and knowledge bases is being acknowledged by employers. This accreditation is precisely what diplomas fail to do. Specialty programs (nursing, medicine) accredit the skills and knowledge of the graduates, but this is not true of the vast majority of diplomas and credentials.

The job-market value of a college degree was relatively high in the 1970s when Spence developed the Signal Model because the number of workers with college diplomas was still relatively modest (around 15% of the workforce). The most basic function of the market--supply and demand--worked in favor of what was relatively scarce--a college diploma. As a result, the assumption that the applicant had worked hard to obtain the degree was more signal than noise.
Nowadays, conventional credentials such as college degrees are in over-supply:around 40% of the work force has a college diploma of some sort, and an increasing number of college graduates are taking jobs that do not require a college education.

This is reflected in the declining wages of college graduates: Even the Most Educated Workers Have Declining Wages.  

While the cost of higher education has skyrocketed (tuition is up 1,100% since 1980), the educational yield of higher education has declined. The national study Academically Adrift: Limited Learning on College Campuses, found that over one third of college students "did not demonstrate any significant improvements in learning critical thinking and other skills central to success in the new economy" and concluded that"American higher education is characterized by limited or no learning for a large proportion of students.".

From this dismal record, we can extrapolate that another third gained marginal utility from their investment of tens of thousands of dollars and four years of study.

Google is widely viewed as a bellwether of the new economy. It is noteworthy, then,that Google has found that academic success has little correlation with being productive in the workplace. Lazlo Bock, Senior Vice President of People Operations at Google, made the following comments in an interview published by the New York Times in June 2013:
One of the things we've seen from all our data crunching is that G.P.A.s (grade point averages) are worthless as a criteria for hiring, and test scores are worthless. Google famously used to ask everyone for a transcript and G.P.A.s and test scores, but we don't anymore. We found that they don't predict anything. What's interesting is the proportion of people without any college education at Google has increased over time as well. So we have teams where you have 14 percent of the team made up of people who've never gone to college.
Signaling an ability to grind though four or five years of institutional coursework is no longer enough; the signaling needed to indicate an ability to create value must be much richer in information density and more persuasive than a factory model diploma.

A resume is equally thin on information that accredits a worker's knowledge, skills and professionalism. A resume is a public-relations summary that everyone knows has been tailored to present the candidate in the best possible light. And precisely how useful and trustworthy is PR in any setting?

Put yourself in the shoes of a hiring manager or potential collaborator: there is precious little useful information in either a diploma or a resume. As a result, human resources departments have been tuned to eliminate as many candidates as possible by signal-based winnowing rather than by the collection of useful information on the skills, knowledge and professionalism of the potential employee/collaborator.

Conforming to social behavioral norms and being able to grind through mind-numbing work used to be enough to create value in the economy--but this is no longer the case for high-value (i.e. well-paid) work. The "signaling" camp holds that a degree showing the student sat through four or five years of classes is sufficient to justify hiring the person. That the student learned essentially nothing useful doesn't matter; the entire value of college is in the last class needed to get the diploma.

This was true in the long postwar boom when the number of well-paid jobs expanded at a faster rate than the number of college graduates. This is simply no longer true.

In contrast to the "signaling" theory of value, the "human capital" camp holds that working knowledge is what creates value. If the student learns little critical thinking, real skills or practical knowledge, then a college degree has little value.

Conformity and being able to navigate stifling bureaucracies no longer creates value or helps employers solve real-world problems. This is why college graduates can send out hundreds of resumes and not even receive a single reply, much less an interview or job offer.
Systems analysis teaches us that changing the parameters of a system (for example, adding another line to your resume or getting another degree) does not change the system; only adding a new feedback loop can change the system.

Clearly, an entire new feedback loop of accreditation is needed, and fortunately that feedback is within our control: it's a process I call accredit yourself. The most powerful feature of accredit yourself is the process is open to anyone: recent college graduates, those without degrees, those re-entering the workforce, those seeking to launch their own enterprises--everyone who wants an income stream in the emerging economy.

I outline the process of accrediting yourself in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. The fundamental concept is straightforward: don't rely on signaling--prove your skills and knowledge with real-world examples and accounts from respected people in your field. Don't rely on fluff PR--demonstrate your skills and knowledge in a verifiable fashion.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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