Estimating the Labor Market Signaling Value of the GEDJohn H. Tyler; Richard J. Murnane; John B. WillettThe Quarterly Journal of Economics, Vol. 115, No. 2. (May, 2000), pp. 431-468.Stable URL:http://links.jstor.org/sici?sici=0033-5533%28200005%29115%3A2%3C431%3AETLMSV%3E2.0.CO%3B2-CThe Quarterly Journal of Economics is currently published by The MIT Press.Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtainedprior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content inthe JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/journals/mitpress.html.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academicjournals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers,and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community takeadvantage of advances in technology. For more information regarding JSTOR, please contact [email protected]://www.jstor.orgThu Aug 23 09:41:18 2007ESTIMATING THE LABOR MARKET SIGNALING VALUE OF THE GED* This paper tests the labor market signaling hypothesis for the General Educational Development (GED) equivalency credential. Using a unique data set containing GED test scores and Social Security Administration (SSA) earnings data, we exploit variation in GED status generated by differential state GED passing standards to identify the signalingvalue of the GED, net of human capital effects. Our results indicate that the GED signal increases the earnings of young white dropouts by 10 to 19 percent. We find no statistically significant effects for minority dropouts. The positive correlation between education and earnings is one of the consistent findings of the human capital literature. In the early 1970s, however, Arrow 119731 and Spence 119731 formu- lated an alternative, information-based explanation for the educa- tion-earnings relationship. Over the last 25 years many econo- mists have conducted empirical work aimed at exploring the signaling hypothesis. It has proved difficult, however, to distin- guish between human capital and signaling explanations of the observed relationship between education and earnings.l :g We are especially grateful to Jeffrey Kling, Joshua Angrist, Lawrence Katz, and Caroline Minter Hoxby for helpful comments. We owe thanks to Janet Baldwin of the GED Testing Service of the American Council on Education, Linda Headley Walker of the State Education Department of New York, Leslie Averna of the Connecticut Department of Education, and John Sojat of the Florida Depart- ment of Education for their assistance in providing data on GED testers, and to personnel of the Office of Research and Statistics at the Social Security Administra- tion's Baltimore Headquarters, particularly Peter Wheeler and Russell Hudson, for providing and assisting with Social Security earnings data. The support of these individuals and organizations does not imply their endorsement of the contents of this paper. We gratefully acknowledge the support provided by the National Center for the Study of Adult Learning and Literacy (NCSALL) and the Rockefeller, Russell Sage, Spencer, and Smith Richardson Foundations. Work supported by NCSALL was supported under the Educational Research and Development Centers Pro- gram, Award Number R309B60002, as administered by the Office of Educational Research and Improvement/National Institute on Postsecondary Education, Librar- ies, and Lifelong Learning, United States Department of Education. The contents do not necessarily represent the positions or policies of the National Institute on Postsecondary Education, Libraries, and Lifelong Learning, the Office of Educa- tional Research and Improvement, or the United States Department of Education, and you should not assume endorsement by the Federal Government. 1. For recent attempts see Lang and Kropp [19861, Jaeger and Page [19941, and Park [1994]. o2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. The Quarterly Journal of Economics, May 2000432 QUARTERLY JOURNAL OF ECONOMICS Ideal data for identifying the returns to a signal would contain exogenous variation in signaling status among individu- als with similar levels of human capital. In this paper we approximate that ideal in estimating the returns to a particular labor market signal, the General Educational Development (GED) credential, and in so doing we provide a test of the signaling hypothesis for this credential. The GED was introduced in 1942 to provide a way for veterans without a high school diploma to earn a secondary school credential. The GED program has evolved markedly so that today the credential is the primary "second chance" route to high school certification for school dropouts in the United States. Each year more than one million young people drop out of school, and eventually about one-third of them will acquire a GED. Using interstate variation in GED passing standards, we are able to compare individuals who all chose to try to obtain a GED and who have the same GED test scores, but who differ in GED status because of differences in the stringency of the passing standards in their state of residence. We will argue that this "natural experiment" research design allows us to net out the effect of human capital on earnings, leaving clear estimates of the signaling value of the GED credential in the labor market. Our estimates indicate that for young white dropouts who are on the margin of passing the GED exams, the signaling value of the GED increases annual earnings by 10 and 19 percent. We do not find statistically discernible returns to the GED signal for young minority dropouts, a puzzle we discuss later in the papere2 In