Screening graduates by university is outdated in the information age

Recently, the UK government announced a new visa scheme that offers employment to “high-potential individuals” from overseas. These are defined as graduates from universities that are in the top 50 of at least two of the three main global university rankings. But the obvious question it raises is whether the ranking of a graduate’s alma mater really is the best way to identify high-potential individuals.

It’s time to revisit the timeless debate over the value of a university education. Is it human capital? Or is it signalling? Human capital theory, pioneered by Nobel laureate Gary Becker, views higher education as an investment that makes people more productive. Individuals go to university because they can expect positive returns to their investment. Under this neoclassical view, we assume that both employers and jobseekers have sufficient information about each other, such that labour market rewards will be allocated according to people’s abilities and preferences.

Signalling theory, proposed by Michael Spence (also a Nobel laureate) assumes, on the contrary, that we lack information to fully grasp people’s true ability and potential. Because of this information deficiency, employers typically use market signals, such as educational credentials, as proxies for productivity.

Getting to know people’s true abilities and potential certainly requires time and effort. The job application process can generate a large volume of paperwork, which takes many hours to review before recruiters even get to the interview stage. Are the costs worth the benefits? After all, the universities have already screened their students according to their abilities. Why not just assume that these are smart people and save the screening costs?

Granted, there is close correlation between graduates’ university ranking and their human capital. But the two are not synonymous. There is great variance in abilities across universities, but also within universities. If employers (and immigration officials) screen job applicants based on university rank alone, they risk approving low-ability individuals from “top” schools and rejecting high-potential individuals who attended lower-ranked schools.

More disturbingly, the majority of the 37 universities on the UK government’s list are based in the US, with a handful from Europe, East Asia and Canada. There is a serious under-representation of universities from Africa, Latin America and South Asia, which gives a strong impression of global elitism, as pointed out in a recent Times Higher Education editorial.

Furthermore, when employers and national governments start posting their preferences for particular universities, it only fuels the already overheated competition for entry into those institutions.

As I argue in a 2019 TEDx talk, today’s younger generation realises that the rewards of getting a diploma from an elite institution are sizeable and getting bigger. When the race towards credentialism intensifies, people shift strategies; they start investing in market signals and not necessarily in their human capital. Put more bluntly, people start caring more about where they graduate from, and less about how much value they are adding to their human capital base.

It also feeds a cycle of institutional prestige and graduate success that is very difficult for outsiders to break into. The graduates of top universities land better jobs because they graduate from top universities. The universities, in turn, can evidence their elite status via the success of their graduates. This further solidifies their position in the rankings, which are driven both explicitly and implicitly by reputation. It is social reproduction of elites in the making.

In the case of the UK government’s initiative, a spokesperson for the Home Office commented that rankings provide “independent validation” of the universities on its list, while also holding out the “opportunity for new international universities to move up the ranks and join this list in the future.” I certainly agree that the list provides further validation for those on it, but I remain sceptical that those excluded can easily penetrate the top 50.

Moreover, I am doubtful that the information scarcity to which signalling theory responds is still a reality. Signalling theory was originally proposed in the 1970s, when acquiring information was indeed unavoidably expensive. But now, some 50 years later, a lot of information is available at our fingertips.

In the age of big data, universities themselves disclose data about their schools, students, academics and alumni. Individuals also post lots of information about themselves, including their education and professional background. It would not be so difficult to collate this.

So what is the excuse? How is it that demand for signals is growing stronger rather than weaker? Shouldn’t we be moving away from signals and university rankings, now that data are so abundant? The answer seems to be that employers (and governments, in the case of the UK) have become lazy. They are simply not willing to make the extra effort to gather information – beyond looking at university rankings – to identify true talent.

Signals can complement human capital, but they can never be a true substitute for it. Rewarding only those with strong signals deprives others with weak signals of the opportunity to compete based on their true abilities. But the new UK visa scheme underlines that the end of the race for credentials is still a very long way off.

Hiroshi Ono is professor of human resource management at Hitotsubashi University Business School in Tokyo.