Politics has often obscured economics in the raucous debate on tuition fees, perhaps rightly so given the plausible case that to model education as a good at all is a flawed approach to the issue. But if opponents of the increase wanted to fight fire with fire the field of information economics provides an argument that undermines a major part of the coalition’s case.

The argument is an application of a classic paper by Michael Spence, in which he investigates the role of signalling in alleviating the problems resulting from asymmetric information in the labour market. Spence’s model has two types of workers – Alphas and Betas – and Alphas have a much higher productivity. Workers know their type but firms can’t tell. The result is that the real wage is simply set at the average productivity. Now suppose workers are given the option of going to university, and that Alphas will get a degree if they attend but Betas will fail. Alphas can signal their type to firms with a degree certificate, and firms can reward them with higher wages. As long as the wage increase is greater than the cost of education, the information problem is solved. This is probably the case in the real world – the “graduate premium” is estimated at around £100 000 across a lifetime, well above the new cost of £27 000.

So far so good for the coalition – the model predicts that unless fees were to soar above £30 000 a year, topping Ivy League prices, Alphas will still choose to go to university. However the model also has a less welcome message: raising fees does nothing to promote efficiency. The coalition’s argument goes like this; by ensuring students are faced with something like the true cost of their education higher fees will automatically induce the right choices about university. Spence shows that to be false, because in his model Alphas will choose to go to university even though it doesn’t make them any better at anything. Despite a degree having no impact on productivity its value as a signal is enough to get Alphas cramming into the lecture theatres. Going to university is the right decision for them (as it saves them from the low wages on offer to those without a degree) but it reduces economic efficiency, and no increase in the price can change that fact.

What should a government do under the Spence model of education? Interestingly, this is one of those times where the supposed bedfellows of economic theory and liberalism clash. As higher education imposes societal costs but has no societal benefits the economically efficient policy is to ban it. The coalition can quite reasonably hold that higher education does have productivity benefits (even if the mutterings of disgruntled employers might suggest otherwise), and so the policy prescriptions of the model can be safely ignored. But Spence’s insight, that education can be rationally chosen purely as a signal, disallows the seemingly powerful argument from economic efficiency and forces the coalition to defend the increase on other grounds.

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