Sunday, July 24, 2016

Genius Because Paper met Wall: Sheepskin Effects and Economic Value (Part VII)

We continue our travel down the open road of economic happiness by evaluating Simkovic & McIntyre's Economic Value research in multi-part depth.  Like making love to a woman who's clinically insane and on crack, we keep going back.  Not sure why, but we do.  And it keeps getting better and better and better...

In Part VI, we took a deeper look at the overall mathematical model of Economic Value, discussed some of the basic concepts, and praised Simkovic & McIntyre's genius is presenting a human capital theory that departed from the Mincer formula and its adaptations for reasons that remain brilliantly opaque.

In this part, we're going to ask why they ignored an alternative explanatory theory from labor economics.

Economic Value is premised on a human capital theory, i.e., that investments in human capital (through education) increase earnings and that the primary variable is the time spent on investment.  Simkovic & McIntyre propose, essentially that the investment in human capital of going to law school benefits the student whether they work as a lawyer or not.

An alternative, however, is a specific signalling theory, referred to in the literature as a sheepkin effect, whereby it's the degree that causes a rise in the market value of the labor rather than the actual time investment in education.  Matt Leichter basically covers this argument as well as it can be, so I'll let him take over:
Without explanation, the authors reject signaling theory, an alternative that appears in an article by David Card cited in footnote 4 (PDF) of “Economic Value.” Card’s article displays a chart, though outdated, showing that professional school graduates make significantly more money than the trend predicts. Card identifies this phenomenon as the “sheepskin effect,” which means the additional earnings degree-holders obtain over what they would have earned with just an additional year of schooling.[i] Given that most states require a law degree to practice law, the sheepskin effect, which doubles here as a “licensed professional effect,” is probably very pronounced. The utility of the 58,000th minute of law school that the ABA mandates is very high indeed.
Because I think its incredibly important and is an another insurmountable nail in the non-genius evaluation of Economic Value coffin, I'll lazily copy the chart with Leichter's notation here:
Card Chart
It's not like Card is the only person who points the "sheepskin effect" out, either.  It has been widely studied.  But like true geniuses, Simkovic & McIntyre totally side-step its application.

At this point, we have to ask ourselves exactly what Simkovic & McIntyre are arguing.  Are they even arguing a traditional human capital theory, or are they arguing the JD is a signal to employers that this person is worth more?  As Leichter more or less points out, they've effectively taken both sides and provide no clarity about their precise thesis.  He circles back to the control group problem discussed in Part III:
At this point, we should declare “Economic Value” a mistrial. The authors overeagerly tested the data without thinking through the theory discussed in their own citations. A “premium” cannot be measured until someone compares the earnings of law school graduates to the earnings of those who’ve completed all or nearly all the required law school coursework but didn’t graduate. If the earnings of both groups are the same, then the authors have a basis for claiming that law school increases people’s earnings based on the human capital theory.
In any event, Simkovic & McIntyre know the research is out there suggesting that credentials - and not years of education - may be causing any observable shift in earnings.  They don't even make an attempt to address this theory, which would mean that we might be able to essentially give out law degrees to gifted BA holders with the same effect.

But fuck it, it's genius.  Simkovic & McIntyre don't need a clear population definition.  They don't need an adequate sample.  They don't need an adequate control group.  They don't need a recent sample - it's 2008 somewhere, right?  They don't need to situate their literature in the existing theoretical landscape or address alternative theories to explain the observed phenomena.  They don't need to address any of Leichter's eleven points.

Fuck science.  Go to law school.


  1. The problem with your argument is that every person I know of who disagrees with S&M also claims a law degree has NEGATIVE signaling value. They all claim that employers do NOT want to hire JDs for various reasons. So your argument completely ignores all of the evidence presented by people like Campos et al.

    1. I don't believe there's a unified law school premium (credential-based, human capital, or otherwise), and I'm not the one who's put forward the idea (nor is Leichter or Campos).

  2. "The problem with your argument is that every person I know of who disagrees with S&M also claims a law degree has NEGATIVE signaling value."

    Overly simplistic; assumes one monolithic pedigree and social class of law school graduate and one hiring market. Employers view a JD from Harvard differently than a JD from Cooley. I believe both Leichter and Harper burst this particular fart years ago, so I'll leave it at that, except to say there is literally decades of literature on school and class hierarchies in the legal profession.

  3. As others have said more cogently than me, if law school education independent of the degree, the credential, the signialing effect and as a proxy for entrance to a restricted profession "magically" increased productivity and earnings, then every rational entity (an individual or a family or a firm) would do whatever they could to have everyone -- everyone -- go to law school; that is, there could never be too many lawyers and everyone should go to law school.

    But, of course, it is not independent of these effects.

    What would be the average salary of a lawyer if every single adult had a law degree and passed the bar exam? What would the GDP be? Would it differ from the average salary of all workers and the GDP before this massive credentialling took place?

  4. Every time I read "sheepskin effect" I start playing with myself before I realize that I'm doing it. And it's distracting. I doubt I'm the only one, so could we call it something else? In any event a tastefully framed $heep$kin from a T-14 signals something different from a laminated TTT degree. So it's really a case of sheep versus lam.