Chapter 7: Skills and economic outcomes

Overview and highlights

This chapter examines economic outcomes associated with differences in observed skills. First, the rewards to literacy, numeracy and problem solving skills on labour markets are studied with a structural model that specifies the joint determination of personal earnings, education and cognitive skills. Second, the likelihood of receiving social assistance transfers for individuals at different skill levels is estimated. This latter analysis adjusts for education, age, gender and household income levels. Similarly, findings on the likelihood of earning investment income for respondents at different skill levels are presented.

Key findings of these analyses are:

• Skills have a large effect on earnings in the majority of countries. The extent to which economic rewards are attributable to either skill or education is mixed and varies by country.

• In Bermuda and Italy, the returns to skill overshadow the effect of education. After accounting for individual skills, wage returns to education are either zero or negative. This suggests that adults with additional years of schooling who do not display a commensurate level of skill are not rewarded for their additional schooling on the labour market.

• In Canada and the United States, the labour market appears to separately reward both the skills measured in ALL and additional schooling.

• In Norway, the findings indicate that both education and skill are valued, but with a higher relative return accruing to the latter. In fact, the labour market returns to numeracy overshadow the return to education. Hence if well-educated adults lack in numeracy skill then they derive no benefit from any additional years of schooling.

• Results suggest that the labour market in Switzerland does not reward prose, document, numeracy or problem solving skills separately from years of schooling. Skills are only rewarded in so far as adults who have completed additional years of schooling also have higher skill proficiencies.

• Despite the strong associations between skill and economic outcomes reported above, there are significant proportions of workers who have medium to high levels of skill but who nevertheless occupy low-paying jobs. Naturally the opposite is also true. There are low to medium skilled workers who are nevertheless well paid.

• Low-skilled respondents are more likely than high skilled respondents to receive social transfers in half of the countries surveyed. This is the case in Canada, Norway and the United States, even after adjusting for education as well as age, gender and household income. This relationship is not significant in Bermuda, Italy and Switzerland.

• Not surprisingly, since medium to high skilled adults tend to be paid higher wages, they also have more opportunity to accumulate capital. Hence they are more likely than low skilled workers to have investment income on top of their wage earnings. This is the case in Bermuda, Canada, Switzerland and the United States. In Italy, however, this relationship is not significant once the effect of education and household income have been taken into account.