A university degree is a signal coming through loud and clear to employers

Did you choose that arts degree to “signal your virtue” – to demonstrate your social superiority by picking a fancy-sounding, but useless, qualification?

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So why did you choose that arts degree at university? Was it because you were fascinated by philosophy? Did you have a passion for studying the history of art? Maybe you felt it would be intellectually fulfilling to spend three years reading English literature. Or maybe it was none of those things. Perhaps you were actually trying to “signal your virtue” – to demonstrate your social superiority by picking a fancy-sounding, but useless, degree.

That’s one of the arguments put forward recently by free market think-tank the Adam Smith Institute, drawing on the theories of Ryan Murphy of the Southern Methodist University in Texas about “the new aristocrats”.

“A modern aspirant elitist would be better off getting an arts degree than buying a gas-guzzling four-by-four,” argues the ASI, while suggesting that public subsidies for such luxury activities ought to be slashed.

I write as a history graduate so perhaps I’m not neutral here, but that comes across as a pretty cynical view of the motivations of arts undergraduates – and not, more importantly, one that seems to be backed up by any evidence from the ASI. And Mr Murphy’s paper itself is an unfocused ramble, shading into paranoia, about environmentalists, hipsters and indeed anyone who might not share the political philosophy of American conservatives.

And yet there’s a germ of an important economic argument buried in what the ASI says about arts degrees. Such qualifications may well provide a “signalling” effect. But it’s less “virtue” that is being telegraphed than “employability”.

Consider a typical job interview. There is an information asymmetry in this situation: the applicant knows a great deal about themselves and their aptitude for hard work, but the employer doesn’t. The candidate could turn out to be a lead-swinging duffer or a high-productivity diamond.

Of course good candidates will probably stress in the interview how dynamic they are and what a fabulous team player they will be. But the problem is that the bad ones, the ones who secretly have no intention of making an effort, will often do the same. Talk is cheap. So what evidence can the employer draw on in making their selection?

The ASI may be right that, from the point of view of the vast majority of employers, arts degrees have no direct “utility”. But the very fact a candidate has managed to complete a degree – even an arts degree – tells a story. It signals that the person in front of the interviewer has enough discipline to get through a three or four-year academic course without flunking out.

Functionally useless as they might be, arts degrees do tend to require a certain level of hard work, particularly if the university has a good reputation. And that the student has often paid for the degree themselves by acquiring a student loan – anticipating the benefit it will reap them in the jobs market – suggests they genuinely want a job at the end of it. The truly lazy and uncommitted probably wouldn’t make that investment.

As the economist Michael Spence hypothesised in the 1970s, an arts degree can be a rough and ready signalling device, which lubricates the labour market in a way that assists efficiency.

Largely thanks to Mr Spence, signalling is now widely recognised as an economic phenomenon. We see it most prominently in adverts on television. Often these don’t impart very much useful information about a product. Think of those John Lewis Christmas adverts – man on the moon? How does that tell us if John Lewis’s clobber is better value than House of Fraser’s? But if a company has invested in advertising, it sends a signal to the consumer that this is a reputable firm that intends to stick around for the long term, rather than a fly-by-night operation that might be gone when you take your goods back because they are faulty.

Signalling is why banks used to spend money on marble-floored headquarters – to send a subliminal message to depositors their money was safe (even when it often wasn’t).

A more interesting line of inquiry than the ASI’s hypothesis about the virtue signalling of arts degrees would be to examine when such screening tips over from being a useful rule of thumb, or heuristic, to being economically harmful. Research by Alan Milburn’s Social Mobility and Child Poverty Commission shows just how homogeneous the backgrounds are of many members of the senior professions, with 75 per cent of senior judges attending Oxford and Cambridge, 50 per cent of diplomats and 33 per cent of BBC executives – compared with less than 1 per cent of the population. Similar outsize proportions of the professions come from private schools.

That is often put down to cronyism, or the inadequacies of state education. But perhaps it’s also signalling. Perhaps managers are selecting people with similar educational backgrounds to their own, not out of prejudice but out of fear of making a hiring mistake. If similar signalling, based on an applicant’s schooling, is in action at entry interviews for elite universities, it’s not hard to see how a cycle of unmerited privilege could set in.

There is also powerful evidence of some distinctly malign signalling in the jobs market, based on something, unlike education, that the candidate cannot even influence. As David Cameron recently pointed out, research suggests job applicants with an “ethnic sounding” name are half as likely to be selected for a face-to-face interview as those with a regular “white sounding” name, even when candidates have identical educational qualifications. Leave aside the noxious discrimination, one doesn’t need to be an economist to appreciate the waste of talent such figures imply.

This, then, is a conundrum. Managers probably do rely on heuristics like education screening to navigate the treacherous employment market, where information asymmetry is rife. Yet such rules of thumb can also be economically damaging.

There have been some interesting developments in this area of late. Last year, after chivvying from Downing Street, big employers including HSBC, KPMG and Virgin Money committed themselves to “name blind” admissions procedures. The accountancy firm Deloitte is going further and adopting “university blind” job interviews. It may not work. Managers may fall back on other, even more unreliable signals – such as a candidate’s accent or clothes – to make their choice about potential. But it’s certainly worth trying.

Perhaps the ASI would dismiss this as mere virtue signalling by the companies that have signed up to these new methods. But for the rest of us it’s a timely and important experiment.