What do educational credentials signal and why do employers value credentials?

This paper examines whether employers can infer information about workers' pre-college abilities from the college credentials they acquire and whether employers value the attainment of credentials because credentials signal these abilities. I find that a high school diploma, college attendance, a bachelor's degree and a graduate degree signal higher pre-college abilities that are reflected in scores from tests administered to respondents in the NLSY. However, an associate's degree does not. Estimating a sorting model of wage determination, the results indicate that employers do value the attainment of a bachelor's degree in part because it signals these pre-college abilities. The coefficient estimates on an associate's degree and a bachelor's degree remain statistically significant after controlling for ability. This indicates that these degrees mark other attributes that employers find worthwhile, perhaps unobserved ability such as motivation and perseverance. [JEL J31] (C) 1998 Elsevier Science Ltd. All rights reserved.