Signalling theory suggests that we may need two categories of university degree

In The Conversation last week, Ananish Chaudhuri (University of Auckland) argued the case for having two categories of university degree:

And while cognitive abilities such as reading, writing and maths matter, so too do social skills such as empathy, resilience and an ability to work in diverse groups and with diverse views...

Universities play a crucial role in developing these skills. But the emerging two groups of students – on campus and off – are not getting the same education. The increasing emphasis on online instruction and exams is devaluing degrees...

This suggests we may need to distinguish between online and on-campus students in each of our courses. The course content will be the same, but the assessment methods will be different.

Online students can take tests, quizzes and exams remotely. Some of this may also be available to on-campus students. But on-campus students will be expected to come to lectures regularly, ask questions, write, speak and engage in interactive tasks, including group work.

Would students sign up for on-campus courses but simply not attend? This could be prevented by making sure each student completes tasks that earn participation marks that count toward on-campus credits. If they fail to do so, they will automatically become online students.

Is this unfair to online students? Not necessarily. Many with jobs may prefer it. In any event, they will have to consider whether the benefits of coming to campus are worth it in terms of job prospects or earning potential.

It is worth reviewing the purposes of education from the perspective of the student. On the one hand, education provides useful cognitive and non-cognitive skills that have value in the workforce. In theory, skills development need not necessarily be different between in-person students and online students. However, some 'transferable skills' like teamwork and interpersonal skills are more difficult to develop in an online environment (as Chaudhuri notes).

On the other hand, education provides a signal to employers about the quality of the job applicant. Signalling is necessary because there is an adverse selection problem in the labour market. Job applicants know whether they are high quality or not, but employers do not know. The 'quality' of a job applicant is private information. High-quality (intelligent, hard-working, etc.) job applicants want to reveal to employers that they are hard-working. To do this, they need a signal - a way of credibly revealing their quality to prospective employers.

In order for a signal to be effective, it must be costly (otherwise everyone, even those who are lower quality job applicants, would provide the signal), and it must be costly in a way that makes it unattractive for the lower quality job applicants to attempt (such as being more costly for them to engage in).

Qualifications (degrees, diplomas, etc.) provide an effective signal (they are costly, and more costly for lower quality applicants who may have to attempt papers multiple times in order to pass, or work much harder in order to pass). So by engaging in university-level study, students are providing a signal of their quality to future employers. The qualification signals to the employer that the student is high quality, since a low-quality applicant wouldn't have put in the hard work required to get the qualification. Qualifications confer what we call a sheepskin effect - they have value to the graduate over and above the explicit learning and the skills that the student has developed during their study.

Now we can see where there is a key difference between in-person and online education. In-person education is more costly than online education, even if the tuition fees are the same, because it requires effort for a student to get themselves onto campus and into class each day. Higher-quality students (who will be higher-quality job applicants) are more likely to be conscientious and make this effort than lower-quality students. So, having an in-person education should provide an additional signal of quality to employers, over and above the signal provided by the degree itself.

However, if there is no way for the in-person students to distinguish themselves from the online students, then the value of the signal provided by in-person education is lost. Chaudhuri argues that the solution is to create a two-tiered qualification system. One (in-person) qualification would convey a signal of high quality to employers, and the other (online) qualification would convey a signal of lower quality to employers.

I'd argue that this already happens to some extent. It's the reason why Massive Open Online Courses (MOOCs) haven't displaced traditional education, despite being free or low cost. Employers can tell the signalling value of a degree when compared with studying online using a MOOC. The problem that Chaudhuri notes is that students' university transcripts probably don't clearly identify students who have done their study in-person from those who have done their study online.

Of course, savvy employers don't only rely on job applicants providing signals. Employers engage in screening, in order to reveal the private information for themselves. They do job interviews and subject job applicants to various pre-employment tests, which helps the employer to tell the high-quality and low-quality job applicants apart. It would not surprise me at all to learn that, as part of the standard job interview script, employers now ask how much of their degree a job applicant completed online. However, job applicants can lie in job interviews, so screening is unlikely to be as effective as signalling in solving the adverse selection problem. Perhaps, two categories of university degree is the best solution after all.

Regardless, the takeaway for students is, as I noted in this 2017 post, that they should be acutely aware of the signals that they are sending to future employers. Education is a signal, but the type of education matters as well.

Read more:

• Why all students need to understand adverse selection and signalling

Some evidence against 'greedflation' in New Zealand

Last month, Sense Partners wrote a report for BusinessNZ on 'greedflation' in New Zealand. As the National Business Review reported earlier this month (paywalled), when the report was released publicly:

Businesses don’t appear to be using Covid-19 and rampant inflation to cover for ‘super profits’, according to a new report out today.

The research by Sense Partners, commissioned by BusinessNZ, assessed whether ‘greedflation’ was happening in New Zealand.

Greedflation in New Zealand? An imported narrative found while costs have gone up across the board, ‘inflated’ profits were not the catalyst.

You can read the Sense Partners report here. Unlike the flaky PriceSpy analysis that I discussed yesterday, Sense Partners actually looked at how profits and input costs changed over time. They describe the methods very briefly in the report:

We can get a better understanding profit margins and components of price increases from detailed quarterly financial data published by Statistics New Zealand... This data is available for non-financial private sector firms.

We can use this data to analyse profit margins from 2017 to 2022, allowing us to compare pre- and post-Covid periods.

We can also use this data combined with real production GDP data... (a good proxy for quantity unit of output) to calculate sale price per unit, which adds up to the increase in cost of inputs, spend on labour and gross profits.

While gross profits will generate taxes and there will be other expenses such as interest payments or money to cover maintenance for example, this gives us a comparable approach to understanding the drivers of inflation.

The key data come from Statistics New Zealand's Infoshare service here. [*] It provides data by industry on sales (operating income), purchases and operating expenditure, salaries and wages, and operating profit. By comparing the changes in these categories over time, we can get a sense of how much changes in prices (which Sense Partners derive from sales deflated by GDP by industry) are detemined by changes in labour costs (salaries and wages), input costs (purchases and operating expenditure), and profits. The results are summarised for New Zealand overall in the following figure:

Notice that most of the change in prices (the black line on the left, or the brown bar on the right) is explained by changes in input costs (the grey and blue bars on the left, or the top two blue bars on the right). Very little of the change in prices is associated with changes in profits. As the report notes:

We found that, over the three years to December 2022, prices rose by 14% (or an average of 4.6% per year) – 71% of that price increase can be attributed to the increase in input costs, 15% to an increase in labour costs and 14% to an increase in gross profits.

And when looking at different industry sectors:

In the sectors with the highest inflation, input costs was the biggest contributor, not wages or profits.

This leads Sense Partners to conclude that:

We found no evidence of widespread increases in profit margins driving up inflation in New Zealand. It is an imported narrative not supported by the evidence.

One of my pet hates is the tendency for media and other commentators to transplant narratives from other countries to New Zealand. Inequality is one example (there is little evidence that it has been increasing in New Zealand in recent years), and greedflation is clearly another. Of course, I am also sceptical about the case for greedflation in other countries as well, as my previous posts on this topic make clear.

Of course, much could be made about the funder of this research (BusinessNZ) having a vested interest in the results not showing greedflation. Also, the omission of the financial sector, which is often held up as an exemplar of greedflation, is notable. The way that Sense Partners determined price changes (deflating sales revenues by GDP by sector) could also be criticised, as it isn't a direct measurement of price changes. It's difficult to say how much bias that introduces into the analysis. Nevertheless, this report demonstrates that the evidence for greedflation in general is very weak at best. 

*****

[*] At least, I hope the link works. If not, you can find the data by going to Infoshare, then sequentially choosing: Industry sectors; Business Data Collection; and Industry by financial variable.

Read more:

• The case against 'greedflation'
• Noah Smith on the case against 'greedflation'
• How not to identify 'greedflation'

How not to identify 'greedflation'

The blog has been a bit quiet of late, while I've been travelling and working in the UK. However, the real world doesn't stop while you're travelling, and I note that the media have continued their crusade against 'greedflation' while I'm away. In the latest instalment, the New Zealand Herald's Front Page podcast reported last week:

Numbers crunched by the independent cost comparison site PriceSpy show that the impact of inflation is not uniform across all companies.

The data shows that some companies are definitely increasing prices much faster than their competitors, often at a far higher rate than overall inflation figures indicate.

Figures released by Stats NZ showed inflation sitting at 6.7 per cent for the year to March, down from 7.2 per cent in December.

Despite this, the pricing data released by PriceSpy across a number of popular categories showed that some products had increased by as much as 29 per cent when comparing January to May in 2022 and 2023 respectively.

By definition, inflation is an increase in the general price level. That doesn't mean that every price goes up, only that prices are going up in general terms. It should be self-evident that price rises are not exactly the same for all goods and services at all times, and that price rises are not the same for all substitute goods within a particular category at all times. In fact, if all firms increased their prices exactly in concert with each other, we should be deeply concerned about collusion in the market, and no doubt the Commerce Commission would take a dim view of that behaviour.

So, given that firms don't all raise prices at the same time or by the same amount, it should be easy to identify some goods or brands that have risen in price more than others. That is all that PriceSpy has done. They could do this any year, whether inflation is higher or lower, and show something similar. That some firms raised prices more than others isn't evidence of 'greedflation'. It is an observation of the normal way that firms change the price of their products (as I have noted before). If you really believe that there is greedflation, then you need to show that price rises aren't resulting primarily from increases in input costs. PriceSpy hasn't done that (but more on that point in my next post).

And to make matters worse, there is this misunderstanding:

“Our research suggests that inflation may not be the sole factor driving price points up, as we are increasingly seeing competing manufacturers up their prices at differing rates, not only to each other but in comparison to the rate of inflation,” [PriceSpy head of public relations] Lindholm says.

This is proof that you shouldn't get your head of public relations to talk about economics. Inflation doesn't cause prices to go up. Inflation is a measure of how much prices have gone up, in general (on average, if you like). It's like saying that your car's speed is causing your car to go faster.

Anyway, coming back to the original point of this post, I'm still not seeing a lot of convincing evidence for greedflation in New Zealand. The analysis by PriceSpy certainly isn't it.

Read more:

• The case against 'greedflation'
• Noah Smith on the case against 'greedflation'

Book review: Why Nations Fail

There are a number of books that have been sitting on my shelves for years, unread. Often, it's no fault of the books, which have good reputations, but because the prospect of picking up a 500-page tome when I could read through a much shorter book, is a bit daunting. That's been the fate thus far of Daron Acemoglu and James Robinson's 2012 book Why Nations Fail. Until this month, when I finally read it. The arguments that the book makes were familiar to me from other sources (including articles written by Acemoglu, Robinson, and others): that countries that are prosperous today tend to have inclusive economic and political institutions, while countries that are poor tend to have extractive economic and political institutions. Acemoglu and Robinson define inclusive economic institutions as those that:

...feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

On the other hand, extractive economic institutions are those that:

...are designed to extract incomes and wealth from one subset of society to benefit a different subset.

It will come as no surprise that the subset of society that benefits from extractive institutions are the political and economic elite. As for political institutions, and the interactions between political and economic institutions, Acemoglu and Robinson note that:

Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are then often structured by this elite to extract resources from the rest of the society. Extractive economic institutions thus naturally accompany extractive political institutions. In fact, they must inherently depend on extractive political institutions for their survival. Inclusive political institutions, vesting power broadly, would tend to uproot economic institutions that expropriate the resources of the many, erect entry barriers, and suppress the functioning of markets so that only a few benefit.

It's an attractive hypothesis, and that Acemoglu and Robinson demonstrate with many detailed examples, both contemporary and historical, that differences in institutions are strongly associated with prosperity, and poverty. However, Acemoglu and Robinson are careful not to claim that institutions explain everything. Indeed, they show that states with extractive institutions can maintain long periods of high economic growth; however, that growth ultimately reaches a limit. The obvious example of this process is the Soviet Union.

The book will not be convincing to everyone. In particular, Australia is held in high regard for its inclusive institutions, along with New Zealand and Canada. Indigenous peoples in those three countries would no doubt be able to provide many counterpoints to the inclusiveness of institutions in those countries. This is all the more surprising given that Acemoglu and Robinson use the distinction between institutions in the US South from the rest of the country as one of their key examples. They also hold up Botswana as an exemplar for other countries, although:

Today Botswana looks like a homogenous country, without the ethnic and linguistic fragmentation associated with many other African nations. But this was an outcome of the policy to have only English and a single national language, Setswana, taught in schools to minimize conflicts between different tribes and groups within society.

I'm not sure that the exclusion of minority languages and cultures, in favour of a national majority, is necessarily an example to aspire to. It made me wonder about the durability of inclusive institutions in Botswana - how long before the minority groups begin to agitate for their own cultures to no longer be minimised.

The one thing that the book is light on is a policy prescription for developing inclusive institutions. That is for good reason - it's not an easy task. Acemoglu and Robinson note that:

A confluence of factors, in particular a critical juncture coupled with a broad coalition of those pushing for reform or other propitious existing institutions, is often necessary for a nation to make strides toward more inclusive institutions. In addition some luck is key, because history always unfolds in a contingent way.

So, anyone who is looking for policy advice is going to come away disappointed. Nevertheless, this is a good book, and I think it should be read alongside books that look at long arcs of history and development, such as Jared Diamond's Guns, Germs and Steel. Acemoglu and Robinson skewer geographical determinism in their book, but that doesn't mean that there aren't geographical factors that have contributed to the development of modern institutions.

Overall, I really enjoyed reading this book, and I've now moved onto their 2019 follow-up, The Narrow Corridor. You can expect a review of that book in due course.