The screening hypothesis : an application of the Wiles test / Paul W. Miller and Paul A. Volker.

Abstract

There is substantial evidence of a positive correlation between earnings and educational attainment. What is less clear is whether higher rates of remuneration reflect increased productivity or merely employers' use of credentials as a screening device. Human capital theory argues that the former is likely to be true. The alternative screening or credentialism hypothesis is based upon the assumption that employers believe that the education system itself identifies individuals whose productivity is high. Even if the education system fails to contribute significantly to productivity, it may still be in the employer's interests to utilise such a filtering device to minimise the risk of hiring less productive individuals. A method of discrimination between these two hypotheses which has considerable appeal was proposed by Wiles. In brief, Wiles advocates comparing the salaries of individuals working in areas which make explicit use of the subject matter of their qualification with those of individuals with the same skills working in other areas. Under the screening hypothesis there is no expectation that the earnings of graduates in a given discipline (eg. economics) will vary across work types (or occupations). Human capital theory, on the other hand, would argue that there ought to be a premium to using certain skills other than merely possessing them. This note uses the Wiles approach. Two groups of graduates were selected for study, namely those with training in economics and those with training in science. These particular sub-groups were chosen because they are reasonably sizeable and because of intrinsic interest. For males with economics degrees there was no significant difference between the incomes earned by graduates working in economics and incomes earned by the remainder of the sample. This result is replicated for female graduates in both economics and science, and implies that for these groups employers do not place a premium on the relevance of specific skills. These estimates therefore provide support for the screening hypothesis at -the expense of human capital theory. Such is not the case in the equation for male science graduates, however. Here there is evidence of a significant positive premium for using science related skills, an outcome which favours human capital theory. It is not clear why a difference should exist between male and female science graduates in this regard, though it may be worth noting that while insignificant, the salary increment of female science graduates working in science related areas is still positive. Show more