Human Capital vs. Signaling: The German Reunification as a Natural Experiment

Ulf Rinne 1, Zhong Zhao1
1IZA, Germany, 2Renmin University of China, China

This paper revisits the debate between Becker's theory of human capital and Spence's signaling approach towards education. We explicitly test the theoretical predictions of these two opposing approaches using the German reunification as a natural experiment. More specifically, we exploit the variation in the influence of the political system on curricula across fields of study in university education. We calculate the extent to which different fields of study were influenced by the socialist regime, and apply a difference-in-differences approach for East and West German university graduates. According to the theory of human capital, the value of university degrees obtained in the GDR which were highly influenced by the regime (e.g., law, economics, history) was substantially depreciated when Germany was reunified in 1990. This would not be the case under the signaling assumption. Our results can be viewed as evidence in favor of the human capital theory: we find that the returns to such degrees have been significantly lower than those to degrees in fields of study which had been moderately influenced (e.g., medical sciences).

View full paper