Theories of Signaling and Human Capital: Evaluating the Return on Education. Signaling theories in relation to human capital. In signaling theory, Spencer's argument is that obtaining valid degrees is a crucial signal to an employer regarding potential employee productivity. In this theory, education is considered an individual effort, regardless of the cost of obtaining the degrees. In this regard, Spencer makes some fundamental assumptions, one being that open positions require potential employees to possess a certain set of skills and personality. Additionally, Spencer classifies skill pools into two categories: good and bad, with good skill pools indicating a pool with high productivity potential and bad skill pools indicating low productivity. (Weiss, 1995) However, the theory holds that it is not possible to identify all skill sets and personalities in order to separate good and bad groups. Thus, employers could rely on educational qualifications to differentiate those who have higher productivity potential from those who do not have good productivity prospects. To separate the two, Spencer argues that even if education does not have a direct effect on a potential employee's productivity, it could be a good sign that they have a good or bad pool of skills since good employees would have a lower opportunity cost to continue their education. more education than bad employees. In this regard, good employees would most likely seek to undertake more education, hence the validity of their degrees as a good sign of potentially high productivity which would then translate into higher earnings. (Sessions & Brown, 1999) On the other hand, there is an argument that education has a direct effect on an employee's earnings through his...... middle of paper ..... Both theories come to a similar conclusion that education is a factor in determining an employee's earnings, although the human capital model excludes unobserved traits of the education factor from the model while the theory of signaling includes the traits in the factor. Works CitedChelli, F. Castagnetti, C. & Rosti, L. “Educational Performances as Signaling Devices: Evidence from Italy.” Economics Bulletin 9.4 (2005): 1-7. Chevalier, A. Walker, I. Harmon, C. and Zhu, Y. “Does Education Increase Productivity or Just Reflect It?” Economic Journal, Royal Economic Society 114.499 (2004): 499-517. Sessions, J. & Brown, S. "Education and employment status: a test of the screening hypothesis for Italy." Economics of Education Review 18 (1999): 397-404. Weiss, A. “Human capital vs. Explanation of salary reporting”. The Journal of Economic Outlook 9.4 (1995): 155-154.