The Sheepskin Effect: Why That Final College Stretch Matters in the Job Market

by | Aug 24, 2023

Imagine that you are interviewing two candidates for a job at your company. They both went to equivalent-quality universities and had the same major. They achieved the same outstanding GPA and participated in similar activities. You like them both a lot. But there’s one notable difference: Candidate A earned her diploma while Candidate B left college just a few classes shy of completing her degree.

Would you prefer Candidate A over Candidate B? If so, why? They basically have the same educational pedigree — those last few classes can’t make Candidate A materially more educated.

Economists have studied this question and have confirmed that finishing those last few classes matter: Having a diploma translates into significantly higher wages over a career. One study found that a diploma conferred an average 31% wage premium over merely having attended college for three or four years without earning a degree.

This is called the “Sheepskin Effect” (in reference to the velum on which diplomas used to be printed) and refers to the fact that most of the college wage premium vanishes if you drop out right before finishing.

What’s the cause of the sheepskin effect? Why does completing the degree matter?

The primary theory is that completing college signals things about the student far beyond what they learned in class. According to economist Bryan Caplan, “The labor market doesn’t pay you for the useless subjects you master; it pays you for the preexisting traits you signal by mastering them.”

Matriculating and then graduating from a four-year college signals certain things about a person:

  • Persistence and drive (overcoming challenges along the way)
  • Possession of basic organizational skills (juggling multiple classes)
  • Some level of responsibility (attending most classes, doing papers, completing homework, studying)
  • At least middling intelligence (or if not, at least showing work ethic)

Of course, not graduating from college doesn’t mean that a person doesn’t have those attributes. Plenty of successful people have dropped out of college — Steve Jobs, Mark Zuckerberg, and Bill Gates are obvious examples. And I personally know people who didn’t complete college and are uber-successful.

The Sheepskin Effect reminds us that college isn’t all about (or even mostly about) what we learn in class.


  1. Another perspective: perhaps leaving college a few classes short of a degree could indicate something different… that the person doesn’t want to “play the game” any more, that they have other goals that feel more worthwhile to them, that a wonderful opportunity has come up? Perhaps asking the question, “Why did you decide to leave college?” would yield some fascinating and useful information to a would-be employer?

  2. The way you have described the situation sounds to me that hiring the dropout brings college level skills at a discounted price.

    • Great point!

      • It worked for Brad Pitt.


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Subscribe To The IFOD

Get the Interesting Fact of the Day delivered twice a week. Plus, sign up today and get Chapter 2 of John's book The Uncertainty Solution to not only Think Better, but Live Better. Don't miss a single post!

You have Successfully Subscribed!

Share This
%d bloggers like this: