Signaling Theory

Michael Spence's 1973 paper Job Market Signaling formalized an uncomfortable truth about higher education: the degree's economic value was never primarily about what the student had learned. It was about what the degree signaled to employers — that this person had been selected by a competitive institution, had endured four years of intellectual and social demands, and had emerged with a certification that served as proxy for qualities (intelligence, persistence, institutional reliability) that employers valued but could not easily measure directly. The theory won Spence the Nobel Prize in Economics in 2001 and provides the analytical foundation for understanding why AI's threat to the credentialing function is existential for universities that sell signaling rather than formation.