Sheepskin Effect

Named for the sheepskin vellum on which diplomas were traditionally printed, the concept gained theoretical grounding through Michael Spence's 1973 signaling theory, which argued that education's value lies partly in credentialing rather than skill-building. Empirical work by economists in the 1970s quantified the effect, showing markedly higher income returns at degree-completion thresholds compared to equivalent years of study without the diploma.