Explain how and why GPA might function as a better signal than simply earning a degree. Be specific.

Spence’s original education signaling model has been criticized on the grounds that the presence or absence of a college degree is a relatively weak signal in today’s job market. That is, although the wage gap between those with and without degrees remains large, there appears to be considerable “pooling” of different levels of talent, ability, determination, work ethic, etc., within the group of college graduates. Consider a variation in the model in which firms use grade-point average (GPA) as the signal. No calculations are necessary for this problem.

(a) Explain how and why GPA might function as a better signal than simply earning a degree. Be specific.

(b) Identify and explain completely at least one weakness or deficiency in using GPA as a signal.

(c) Many colleges and universities have been accused of practicing grade inflation—defined as a gradual but steady increase in the average GPA of all graduates. What effect does this practice have on the signaling value of GPA?

(d) Considering your response to part (c), how do you predict High Ability and Low Ability students would react to grade inflation? Be specific.

(e) Some analysts argue that so-called educational signals are instead signals of relative wealth and privilege. How vulnerable is GPA to this criticism? How does it compare to other signals in the labor market?