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Why Are Econometricians So Attractive?

While reading this, you might be taking a well-deserved break from studying hard for an exam of a course, which you find impossible to imagine any use for in your future career. You might even hate the program director for adding this course to your study program. Well, I think you should actually thank him! Let me explain why.

Long, long ago, not long after the dinosaurs went extinct, I was a student, too. My field of studies was econometrics. I shared the lecture hall benches with Jan-Diederik. After finishing his studies, Jan-Diederik, like many other fellow students, took his first job in the ICT business as a software engineer. His starting salary was a multiple of my meager salary as a PhD student. Now, several decades later, econometricians still have an excellent bargaining position in the labor market according to a recent article in the Dutch newspaper Het Financieele Dagblad.

You might wonder: Why are econometricians such attractive employees? Do they acquire unique skills that give them a head start in the labor market? The answer is actually ‘no.’ On the contrary, econometrics has a strong focus on quantitative models that have hardly any application in practice. Jan-Diederik and I were overloaded with calculus, probability theory, linear algebra, general equilibrium models, Bayesian econometrics, Markov chain analysis, cooperative game theory, dynamic optimization, queuing theory, and what not.

Let me give an example from the calculus course to give you an impression of what we did. In this course we learned to prove from the axioms for the real numbers that for any real number x, it holds true that 0 times x equals 0. You might wonder: Is this not trivially true? Actually, it is not, as the following proof shows.

The relevant axioms are, for all real numbers a, b, and x:

  1. For the element 0 it holds true that a = 0 + a

  2. There is an element y such that 0 = y + x (we write y = -x)

  3. There is an element, called 1, such that x = 1 × x

  4. ax + bx = (a + b)x

Now, applying these axioms successively, we have

0 × x

= 0 + 0 × x

= -x + x + 0 × x

= -x + 1 × x + 0 × x

= -x + (1 + 0) × x

= -x + x

= 0,

where the last two equalities follow from axioms 1 and 2, respectively. QED.

(Are you still there?) It is hard to imagine that the labor market would be willing to pay high salaries to people who have acquired the skill of being able to prove that 0 times x equals 0. So, what gave students like Jan-Diederik a decisive advantage in the labor market?

A question like this inspired economist Michael Spence to write a Nobel prize-winning paper on job market signaling. He popularized the idea that intrinsically worthless investments can be quite valuable in markets with asymmetric information. Arguably, for employers it is hard to tell from an application letter or job interview whether an applicant is capable of completing tasks requiring quantitative skills like developing software. By finishing a master’s in econometrics, Jan-Diederik could distinguish himself from a less able software engineer even though computer programming in and of itself only played a minor part in his education. In other words, his master’s degree was a credible signal to future employers that he was a suitable candidate.

Thinking about it, you might realize that we spend a lot of time, energy, and money mainly for the sake of signaling something about ourselves to an uninformed counterparty. Men buy women expensive rings to signal how wealthy they are. Women join men at football matches to show how much they care about them (the men, not the football matches). Job seekers write long application letters to signal their genuine interest in working for the firm. Children throw themselves on the floors of supermarkets to let their parents understand that they highly appreciate the sweets displayed on the shelves. Parents let the child finish his act to let him understand that they have no intention of buying those sweets. Businesses also apply signaling strategies. They signal the quality of their products by spending money on commercials that have zero information content (“always Coca-Cola!”). Other businesses start a price war to signal that they are highly cost efficient so that potential entrants will think twice before entering their market. Such signaling is even commonplace in the animal kingdom. Think about male peacocks growing large tails that have no other use than to show off their sexual fitness.

So, the next time you have to prepare for a difficult exam for a course that has no apparent practical application, you can take some comfort in the fact that by passing the course, you will be signaling to future employers that you are smart enough to perform well as an employee.


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