Signaling or human capital: Evidence from the Finnish polytechnic school reform
We use data from the Finnish polytechnic reform to distinguish between human capital and signaling theories of the value of education. We find that the reform increased earnings of the polytechnic graduates compared to those graduating from the same schools before the reform, as predicted by both the human capital and the signaling models. However, we also find that the relative earnings of vocational college graduates decrease after polytechnic graduates start entering into the labor market. This finding is inconsistent with the pure human capital model and can be interpreted as evidence supporting the signaling model.