One of the hot topics du jour is “credentialing,” or a universally accepted way to verify that an individual possesses a specific skillset. I am, admittedly, a firm believer in the value of education outside of providing for a professional career. But for the purposes of this discussion, I’m going to completely ignore that side of the issue.
I’m instead focusing on the value of education in terms of employers and hiring. People go to school to 1) learn skills that prepare them for any range of trades that they want to pursue as a career; and 2) to signal to employers that they possess such skills. But the system is imperfect; here’s an example:
At Deutsche Bank, I served as an analyst recruiter and saw firsthand how unfairly focused all bulge bracket banks are on feeder schools. Reviewing a resume from a “non-elite” school would only occur when people inside the bank pulled strings to highlight such specific candidates. Meanwhile, we had clearly structured processes to ensure that everyone who applied from Dartmouth (or Harvard or Duke, etc.) had his or her resume reviewed – and not just by a random set of eyes, but by alums of that school. I knew when a Dartmouth kid took Econ 26, 36, and 46, that he had a real interest in the finance world; I also knew never to ask accounting questions in the interview because Dartmouth just didn’t teach that as a subject. That’s a significantly different experience than being the one guy from Podunk State who happened to get a shot through incredible personal hustle. He got grilled on accounting and was given a much higher bar to clear.
This system may be unfair, which is an issue in and of itself – good schools get the best jobs, but not everyone has the same access to good schools to begin with. The other huge problem with the system is how inefficient it is. The most competitive jobs should go to the most competitive (i.e., qualified) individuals. Those individuals may have attended an Ivy League school; but oftentimes, they didn’t and the current job market has no efficient way of screening for that. In other words, very few firms are hiring very few of the right people.
Indulge Me in a Brief Analogy
Think about the job market as the corporate bond market. Investors cannot possibly know all they need to know about every corporation that’s out there trying to sell them bonds. Yet investors are comfortable investing in XYZ Corp. just as they are investing in General Electric. They may require a higher interest rate to compensate for additional risk, but they’re still willing to commit many hundreds of millions of dollars to XYZ for the promise of payments down the road. Why? Because S&P and Moody’s gave XYZ Corp a BB+ or Baa credit rating. Investors don’t need to fully trust XYZ or MNO or UVW Corp.; they just need to fully trust S&P and Moody’s. Those ratings agencies enable liquidity in the corporate credit market.
The education market has no such equivalent and is, consequently, nowhere near as liquid as it could be. The implications for market inefficiency are truly staggering. Selective investors – in this case, highly desired employers like Google or Goldman Sachs – have no ratings agencies to compare educational qualifications across different institutions. As a result, they choose to invest in – hire from – AAA-rated institutions like the Ivy League. College branding has effectively become the ratings agency for individuals. This isn’t necessarily a problem until you consider that college education is supposed to provide the skills that are being assessed in the first place. In other words, it’s as if every single corporate bond issuer gave themselves their own credit rating instead of Moody’s or S&P.