Skills and Earnings in the Full-Time Labor Market
Neeta Fogg, Paul Harrington, and Ishwar Khatiwada
Research on labor market gains associated with investments in human capital most frequently relies on years of schooling completed, or educational credentials, as a measure of human capital. Indeed, it is commonplace in speeches by college presidents to touch upon the increased earnings associated with a college education.
Clearly, the claim is backed by strong evidence. Over the past four decades, the size of the average earnings advantage for completing a bachelor's degree has grown substantially. Large increases in college enrollment rates among young people have resulted—as have large increases in college tuition and fees and skyrocketing student debt.
Yet while the gains from a college education can be quite large, that's not the whole story. Like any investment activity, the economic payoffs do not accrue to everyone. This paper raises the specter that, under some conditions, college enrollment may offer no economic benefit at all.
Using newly available data on the literacy and numeracy proficiencies of American adults produced by the Survey of Adult Skills of the Programme for the International Assessment of Adult Skills (PIAAC), this paper examines the independent effects of three key measures of human capital—basic skills, educational attainment, and work experience—on the earnings of prime-age (25 to 54 years old), full-time employed workers in the United States.
The study is designed to gauge the independent effect of each of these three measures of the human capital stock of workers on their earnings. In line with human capital theory, this study found a strong connection between earnings and each measure, with the details revealing strong gains for those with the most skills and education, but little or no gain, in one particular example, for those who fail to gain a bachelor's degree.
PIAAC provides an unusual opportunity to gain insights into these complex relationships for prime-age, full-time workers. Data on the literacy and numeracy skills for a nationally representative sample are difficult and expensive to produce and are not widely available, whereas data on educational attainment are regularly produced by the U.S. Census Bureau's household surveys. In fact, researchers have tended to use educational attainment as a stand-in for more complete measures of a person's human capital because of its availability.
Educational credentials, however, are not precise measures of basic skills proficiencies. For example, the reading and math scores of public high school graduates in Philadelphia vary enormously. Students from highly selective schools in the city of Philadelphia—where our Drexel University Center for Labor Markets and Policy is located—have the highest standardized test scores in Pennsylvania, while their counterparts enrolled in neighborhood high schools, just a mile or two down the road, have among the lowest.
Using PIAAC data, we find large earnings advantages to basic skills even after statistically controlling for the effect of educational attainment and other worker background characteristics and job traits for prime-age, full-time workers. These findings indicate that basic skills are not only fundamental to achieving higher levels of educational attainment but are also directly rewarded in the labor market in the form of higher earnings.
A summary of key findings includes:
- Higher levels of literacy and numeracy proficiencies for prime-age, full-time employed workers in the United States are associated with large earnings advantages. The earnings of workers with level 3 literacy/numeracy skills are one-third higher than those of their counterparts at level 2. Workers with the strongest basic skills (literacy/numeracy proficiency levels 4/5) earn about 75 percent more than their level 2 counterparts.
- Reflecting the role of basic skills in attaining academic credentials, we found a strong positive connection between basic skills and the level of educational attainment. The difference between the mean proficiency score of workers without a high school diploma and those with a master's degree or higher level of education was sizable: 108 points on the literacy measure and 109 on numeracy.
- However, the share with proficiency scores below level 3 was 40 percent in literacy and 50 percent in numeracy. Proficiency scores below level 3 are considered to be below the minimum standard of proficiencies associated with access to a range of social, economic, and educational opportunities.
- Furthermore, college degrees themselves do not necessarily reflect basic skill proficiencies. Thirty-six percent of those with an associate's degree scored below level 3 on the PIAAC literacy scale; 18 percent of those with a bachelor's degree and 13 percent of those with a graduate degree (master's or higher) did as well. Findings on the numeracy skills among college graduates were even more disappointing. Nearly half with an associate's degree scored below level 3 on the PIAAC numeracy scale; nearly 30 percent of those with a bachelor's degree and one-fifth of those with a graduate degree did as well.
- A set of regression models, estimated to disentangle the independent effect of each measure of human capital on earnings, found that work experience is a strong predictor of monthly earnings. An additional year of work experience is expected to increase monthly earnings by about 3 percent; the rate of earnings growth for each additional year of work experience is expected to slow down as the years of work experience increase.
- As expected, educational attainment is found to have a strong independent effect on earnings. Regression analysis found that the earnings of high school dropouts are expected to be 16 to 17 percent below the earnings of high school graduates, while workers with a bachelor's degree are expected to earn 30 percent more than their high school graduate counterparts, and those with a master's degree are expected to earn about 45 percent more than high school graduates.
- The regression analysis found little or no monthly earnings advantage associated with college education below the bachelor's degree level. Workers with a postsecondary certificate and those who attended college but did not earn a credential are found to have no statistically significant earnings advantage over high school graduates. Those with an associate's degree had only a small earnings advantage over high school graduates.
- Literacy and numeracy proficiencies are found to have a sizable positive influence on monthly earnings. The earnings regression analysis estimated that an increase of one standard deviation unit in the literacy/numeracy test score is expected to increase monthly earnings by about 8 percent.
- Lastly, the regression analysis also found a statistically significant earnings advantage of about 21 percent among those with level 4 or 5 literacy/numeracy proficiencies compared to workers with level 2 proficiencies. Level 3 proficiencies are expected to yield a statistically significant 7 to 8 percent earnings advantage compared to workers with level 2 proficiencies.