College quality signaling and individual performance: effects on labor market outcomes after graduation

Abstract

The association between college attendance and labor market premium is well-documented in existing literature. The signaling process plays a role in the explanation: college graduation serves as a signal for ability to the labor market. However, not only years of schooling but also the college quality may signal for individuals’ ability. In the literature, college quality is mainly measured by the concepts of elite and selective institutions. In this paper, we propose a new measure of the signal for college quality: the performance of the previous cohort that has graduated three years before the individual in the same institution and major. We estimate the returns to college quality and to individual abilities on early career outcomes in Brazil, contributing to this literature on developing countries. Our results indicate that the percentage of the previous cohort graduates who are employed two years after their graduation is a relevant predictive variable of both employability and earnings in the formal sector up to eight years after the individual’s graduation. Specifically, we find that an increase of 1 percentage point in the signal variable is related to an increase up to 44% in the early career wage, decreasing over time.We also investigate heterogeneity returns by gender, individual’s prior working experience and field of education.