Signalling or Human Capital: Evidence from the Finnish Polytechnic School Reform

We use data from the Finnish polytechnic reform to distinguish between human capital and signalling theories of the value of education. We find that the reform increased the earnings of polytechnic graduates compared with those graduating from the same schools before the reform, as predicted by both the human capital and the signalling models. However, we also find that the relative earnings of vocational college graduates decrease after polytechnic graduates start entering the labour market. This finding is inconsistent with the pure human capital model and can be interpreted as evidence that supports the signalling model.