Estimating the Labor Market Signaling Value of the GED

This paper tests the labor market signaling hypothesis for the General Educational Development (GED) equivalency credential. Using a unique data set containing GED test scores and Social Security Administration (SSA) earnings data, we exploit variation in GED status generated by differential state GED passing standards to identify the signaling value of the GED, net of human capital effects. Our results indicate that the GED signal increases the earnings of young white dropouts by 10 to 19 percent. We find no statistically significant effects for minority dropouts. The positive correlation between education and earnings is one of the consistent findings of the human capital literature. In the early 1970s, however, Arrow [1973] and Spence [1973] formu-lated an alternative, information-based explanation for the educa-tion-earnings relationship. Over the last 25 years many econo-mists have conducted empirical work aimed at exploring the signaling hypothesis. It has proved difficult, however, to distin-guish between human capital and signaling explanations of the observed relationship between education and earnings.1