Is a Skill Signaling Gap Worsening Economic Inequality?

Since the 1970s, the United States has experienced growing inequality as the wealthy increased their total income share while the middle class shrunk. One of the most important explanations of this phenomenon is rising college premiums coupled with stagnant returns to high school education. With rapid technological change, the job market increasingly requires skills learned through advanced education, reducing the wages of less-skilled workers with a high school degree or less.

But what if this mismatch is not just about having skills but about the ability to signal your skills? What if employers are overlooking highly qualified applicants simply because they lack a college degree?

These questions motivated a recent study by Blair et al. that investigated the earnings potential of 68 million workers whom they call “Skilled Through Alternative Routes” (STARs). These are workers without college degrees who, based on the skills required of their current position, qualify for higher-wage jobs demanding similar skills. Blair et al. estimate that 11 million of these STARs are low- and middle-wage workers with skills for high-wage jobs that typically hire college graduates.

Matching STARs with higher paying jobs they qualify for could narrow the income gap between college graduates and non-degree holders. What’s stopping employers from hiring them? Blair et al. suggest that, despite the applicability of skills from one industry to another, both employers and job candidates are limited to their existing industries because of “rational inattention”: when the cost of acquiring information is high enough to justify acting on imperfect information. For example, the study authors speculate that a recruiter might view a search for workers outside their field as a waste of time if it is not clear how their skills would apply to their sector. To minimize risk and hassle, they will focus on job candidates with a clear signal, the college degree. From the job candidate’s perspective, searching in a different industry may not be worth the time if it is not obvious how their skills would translate.

What is needed, the authors argue, is a distinct way for STARs to convey their skills to overcome the problem of rational inattention. The authors developed a foundation for this alternative signaling mechanism using the U.S. Department of Labor’s O*NET database, which provides comprehensive information on critical competencies by occupation. These competencies fall under various skill areas such as Content, Process, Social, Complex Problem Solving, Technical, System, and Resource Management. They proceeded to compare the “distance” between skills in different occupations with the difference in wages paid. If the skill distance is close, but the wage differential is high, it suggests an opportunity for lower-wage workers to transition to higher earnings. For destination jobs to be plausible, the authors only included those that employ some workers without college degrees and have recently hired non-degree holders from the origin jobs.

Blair et al. applied this framework to non-degree workforce data from the Current Population Survey (CPS) and identify three kinds of STARs: “Shining,” employed in high-wage jobs paying above $77,000; “Rising,” employed in middle-wage (paying $38,000 to $77,000) or low-wage jobs but with skills for high-wage jobs; and “Forming,” employed in low-wage jobs (paying below $38,000) but with skills for middle-wage jobs. Their analysis was limited to high school graduates aged 25 and above.

All the 68 million identified STARs are eligible for jobs that pay at least 10% more in their state’s wages. The biggest potential gains are Rising STARs in low-wage and middle-wage jobs with high-wage jobs skills, comprising about 11 million workers. Nineteen million Rising STARs are also low-wage workers with middle-wage earnings potential. Combined, these 29 million Rising STARs could see an average 74% income increase if their skills were matched to a relevant destination job.

While these findings suggest a promising role for non-degree skill signaling in reducing inequality, it is important to remember that skill is not the only determinant of who gets hired. The authors acknowledge that their research doesn’t show whether the distance between skills possessed and skills demanded causes gaps between STARs and their earnings potential. Other factors such as age, race, and gender are likely important since Shining STARs are disproportionately older and white while Forming STARs are mostly younger and nonwhite women. Corporate power over labor markets could prevent skilled workers from upward mobility. Blair et al.’s use of job descriptions to measure skill distance may also be an imperfect predictor of actual worker skills and employer requirements.

Despite these limitations, the research demonstrates a vast earnings gap that could be mitigated by making it easier for both employers and workers to see the translatability of skills across different industries. Credentialing schemes alternative to college degrees offer a potentially low-cost solution to workers for whom college is prohibitively expensive. The authors note that future research will further examine the extent to which skill distance explains hiring practices.

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Blair et al. 2020. “Work Experience as Job Market Signal for Workers Without College Degrees,” NBER. https://www.nber.org/papers/w26844.