Fake it till you (don’t) make it: Fake diplomas and signaling in labor markets

Does schooling create new skills or does it just provide signals of individuals’ underlying abilities? This is a classic question in economics, and to date, it has been difficult empirically to measure the extent to which one theory dominates.

We provide new, innovative evidence on this important question in the context of adult education in Brazil. In 2018, police in Rio de Janeiro abruptly shut down eleven high schools, showing evidence that these schools sold diplomas without providing any training whatsoever. These schools thus provided signals but not human capital. We match student records to historical employment records. We find that initially the return to high school degrees is similar regardless of whether students earned legitimate or fake diplomas. Average returns are sizeable for both. However, within a couple of years, the fake diplomas start losing their value. Employment rates drop to pre-treatment levels, and wage premiums erode. By contrast, true diplomas enjoy larger and stable employment rates and rising wages. We also find additional evidence that the speed at which the fake credential loses its value increases in situations where productivity is more likely to be observable.

Overall, the results provide strong evidence that, at least in the short-run, the signaling model seems to explain labor market outcomes, but that the saliency of the signal erodes quickly.

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