IZA DP No. 2953
Modeling the Signaling Value of the GED with an
Application to an Exogenous Passing Standard
Increase in Texas
J ohn Tyler
D I S C U S S I O N P A P E R S E R I E S
zur Zukunft der Arbeit
Institute for the Study
Modeling the Signaling Value of the GED
with an Application to an Exogenous
Passing Standard Increase in Texas
University of Texas at Dallas
Brown University and NBER
Discussion Paper No. 2953
P.O. Box 7240
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IZA Discussion Paper No. 2953
Modeling the Signaling Value of the GED with an Application
to an Exogenous Passing Standard Increase in Texas*
In this paper we develop a simple model of the signaling value of the GED credential. The
model illustrates necessary assumptions for a difference-in-difference estimator, which uses
a change in the GED passing standard, to yield unbiased estimates of the signaling value of
the GED for marginal passers. We apply the model to the national 1997 passing standard
increase which affected GED test takers in Texas. We utilize unique data from the Texas
Schools Micro Data Panel (TSMP) which contain demographic and GED test score
information from the Texas Education Agency linked to pre- and post-test taking
Unemployment Insurance quarterly wage records from the Texas Workforce Commission.
Comparing Texas dropouts who acquired a GED before the passing standard was raised in
1997 to dropouts with the same test scores who failed the GED exams after the passing
standard hike, we find no evidence of a positive GED signaling effect on earnings. However,
we find some evidence which suggest that our finding may be due to the low GED passing
threshold that existed in Texas for an extended period.
JEL Classification: I2, J31
Keywords: GED, signaling, returns to education, natural experiment
University of Texas at Dallas
School of Economic, Political, and Policy Sciences
P.O. Box 830688
Richardson, TX 75083-0688
* We would like to thank Jean Kimmel, Jeffrey Kling and Richard Murnane, seminar participants at
Concordia U, Federal Reserve Bank of St. Louis, University of Texas at Arlington, UT Dallas and
participants at the 2004 SOLE annual meeting in San Antonio and 2004 WEA annual meeting in
Vancouver, Canada for helpful comments.
The General Educational Development certificate (GED) is an exam-based
credential awarded to about 500,000 high school dropouts in the U.S. each year,
representing almost 15 percent of all high school diplomas, or credentials, issued.
Lacking a high school diploma to certify successful completion of their secondary
schooling experience, the GED is the first, and often only, credential high school
dropouts receive. One reason many dropouts seek a GED certificate is a belief that it will
lead to greater labor market success. Several studies over the last decade have attempted
to determine whether this is indeed the case, with the research questions breaking along
two lines: How do GED holders compare to regular high school graduates? And, how do
GED holders compare to other, uncredentialed high school dropouts?
Most observers agree that the first question has been answered rather
convincingly by Cameron and Heckman (1993). They find that GED holders fare
consistently worse than regular high school graduates on any number of labor market
outcomes. These results were notable, but hardly surprising given the differences in
human capital opportunities between students who drop out and pursue a GED and
students who stay in school until graduation. The most recent data on GED preparation
time indicates that the median study time was only about 30 hours (Baldwin 1990),
substantially less than the 410 hours spent on a high school’s core curriculum in a typical
school year and probably insufficient time for meaningful human capital accumulation.
An answer to the second question—how do GED holders fare relative to
uncredentialed dropouts—is somewhat more contentious, Again, the relatively low levels
of time spent preparing for the GED suggest to many that pursuit of the GED credential
could hardly have a substantial human capital component. This, of course, leaves open to
question the potential of the GED as a labor market signal, a proposition studied by
Tyler, Murnane, and Willett (2000). Using interstate variation in the standard required to
pass the GED exams and acquire the credential, they find GED “signaling effects” of
between 10 to 19 percent on annual earnings.
Similar to Tyler, Murnane, and Willett, the research strategy in this paper also
utilizes different passing standards faced by different groups of dropouts. We use a 1997
change in Texas in the GED passing standards to identify the signaling value of the GED
on the labor market outcomes of dropouts in that state. We argue that the changes in
Texas give rise to a natural experiment that can be exploited to identify the labor market
signaling effects of the GED on earnings, reducing endogeneity due to correlation
between the outcome of passing/not passing and unobserved individual heterogeneity that
may bias Ordinary Least Squares (OLS) estimates.
The American Council on Education (ACE) administers the nation’s GED testing
program and sets the minimum requirements for obtaining the credential. States can, and
regularly have, set state level passing standards above the ACE-mandated minimum.
Prior to 1997, Texas was one of the few states whose passing standard was at the ACE
minimum level. As a result, Texas had one of the country’s least stringent GED passing
standards. In 1997 the ACE mandated a nationwide increase in the minimum passing
standard, a change that was arguably exogenous to Texas. Given these changes and data
on individuals containing GED test scores, we can identify an “affected score group” of
GED candidates whose eventual GED status is “affected” by the change in the passing
standard. Members of the “affected score group” who took the GED exams before 1997