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 Card’s article displays a chart, though outdated, showing that professional school graduates make significantly more money than the trend predicts.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 58,000^th 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:

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.