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Skills and Earnings in the Full-Time Labor Market
Neeta Fogg, Paul Harrington, and Ishwar Khatiwada

Introduction

The 2015 Human Capital Report of the World Economic Forum states that "talent" will be the key factor driving innovation, competitiveness, and economic growth in the 21st century, exceeding even physical capital (what accountants call tangible assets).1 Talent, or "human capital" as it is known to economists in this context, represents the potential of human resources in the production of goods and services. Measured typically by formal educational attainment, human capital is the stock of knowledge, skills, abilities, behavioral characteristics, and other traits of individuals that contribute to this potential. Similar to physical capital development, the development of human capital requires individuals to invest in themselves, with future benefits expected to result.

Benefits from human capital investments are in large measure derived from gains in the cognitive capacity of individuals that make them more productive in the labor market.2 While the gains to human capital investments are most often measured in the labor market, they also can be found in several dimensions of economic and social activities.3

The evidence that human capital and labor market success are closely connected is quite convincing. The connection between skills and success has strengthened over time as the industrial composition of employment in the U.S. economy has continued to shift from goods-producing industries (e.g., construction and manufacturing) to services-producing industries (e.g., health services, professional scientific, and technical services). Furthermore, the U.S. labor market has undergone unprecedented technological change with widespread "upskilling" and automation of routine jobs.4 Technological advances have made the production of goods and services more human capital-intensive. They have altered the staffing patterns of industries, even in goods-producing sectors, toward occupations characterized by higher levels of human capital requirements that complement the increasingly sophisticated technologies and organizational processes used in production. These changes have increased the demand for—and tilted the labor market in favor of—workers with more educational attainment and higher levels of literacy, numeracy, and problem-solving proficiencies. Recent decades have also seen a rise in labor market rewards for noncognitive skills such as soft (or social) skills.5

Looking back at the past century, Goldin and Katz labeled the 20th century as the "Human Capital Century" and considered human capital to be the central determinant of economic growth and rising prosperity in the United States.6 These trends are expected to intensify as human capital becomes an increasingly important driving force behind growth in the 21st century.7

The evidence of this transformation in the labor market is readily available. Workers with higher levels of education have better employment and earnings outcomes compared to those with lower levels of education. Higher levels of education are associated with higher rates of labor force participation, lower likelihood of unemployment, higher likelihood of employment, and more weeks and hours of work over the course of a year.

Earnings of workers rise sharply with their level of educational attainment. In 2014, the median weekly earnings of full-time workers aged 25 and older were just $488 among high school dropouts, rising to $668 among high school graduates, and $761 among those with some postsecondary education below the bachelor's degree level. Among college graduates, median weekly earnings were $1,101 among those with a bachelor's degree and $1,386 among those with an advanced (postbaccalaureate) college degree. Earnings premiums relative to high school graduates were nearly 65 percent among bachelor's degree holders and almost 108 percent among advanced-degree holders.8

The earnings advantage associated with higher levels of educational attainment has been rising over time. Analysis of U.S. Census Bureau public-use microdata files from the Current Population Survey reveals a sharp rise in the earnings of young college graduates relative to high school graduates with no postsecondary schooling. During the second half of the 1970s, the size of the college earnings advantage began to rise from under 20 percent in the early part of the decade and continued to increase through the 1980s, reaching 52 percent in 1990 and 70 percent by 2000. After the turn of the century, the rise in the earnings advantage of young college graduates slowed down as the dot-com recession had a substantial adverse impact on young college graduates and the housing boom created a strong demand for high school graduates in blue-collar occupations. But the earnings advantage of young college graduates rose again, reaching about 74 percent in 2015, that is, for every $1 earned by young high school graduates without any postsecondary education, their counterparts with a bachelor's degree earned $1.74.9

The response to the rising labor market returns to education has been, up to this point, an increase in the level of education of the population. The educational attainment of the population has been rising steadily, particularly at the high school graduation and bachelor's degree levels. In 2015, 88 percent of the adult (25 and over) population in the United States had completed a high school education or higher and one-third had earned a bachelor's degree or higher.10 Education attainment levels are also rising among the nation's youth. The White House announced that the high school graduation rate had reached an all-time high during the 2014-2015 school year of 83 percent.11 Moreover, the college enrollment rate remained at a near record level in the fall of 2015, with nearly 70 percent of recent high school graduates enrolled in college immediately after graduating.12

While educational attainment has risen over time, measures of reading, writing, and math proficiencies of young people paint a less rosy picture of human capital acquisition in the United States. Indeed, the National Assessment of Educational Progress (NAEP) measure of the basic skills of youth is worrisome. The most recent NAEP tests of a cross section of American students reveal a decline in the score of 12th graders on the math test between 2013 and 2015. The reading score of 12th graders remained unchanged between 2013 and 2015 but declined between 1992 and 2015.13

Worrisome developments about basic skills proficiencies are not limited to high school students. Educational Testing Service analysis of the Survey of Adult Skills of the Programme for the International Assessment of Adult Competencies (PIAAC) test scores found that American millennials scored lower than their counterparts in 15 countries (out of 22) on the literacy test and had the lowest scores among all nations in numeracy skills. The study found similarly disappointing performance among teens and young adults in the United States; American 16- to 24-year-olds beat just two countries on the literacy test and had the lowest mean score on the numeracy test compared to all 22 nations included in the study.14

Despite these conflicting signals about trends in educational attainment and skills achievement, increased levels of education are still very closely connected with positive labor market outcomes and remain a good measure of the human capital and productive capacity of workers. But literacy and numeracy skills are also critical and are inextricably related to educational attainment, with academic achievement at the elementary and secondary level exerting a powerful influence on postsecondary enrollment, retention, and completion.

Our analysis of PIAAC data in this report finds large and statistically significant earnings advantages to skills even after accounting for the impact of educational attainment. In other words, among full-time employed workers ages 25 to 54 (a group commonly referred to as prime-age workers) in the United States with identical levels of educational attainment and similar personal characteristics, those with stronger literacy and numeracy proficiencies have higher earnings than counterparts with weaker literacy and numeracy proficiencies. These findings indicate that basic skills development is not only fundamental to achieving educational attainment advantages but is also directly rewarded by employers in the form of higher earnings. However, those benefits for prime-age, full-time workers seem to accrue only at the bachelor's degree level. Even those who attend some college or even earn a certificate do not reap the earnings rewards.

Notes

1 The Human Capital Report, 2015, World Economic Forum, Employment, Skills, and Human Capital Global Challenge Insight Report, 2015, http://www3.weforum.org/docs/WEF_Human_Capital_Report_2015.pdf.

2 Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (Chicago: University of Chicago Press, 1964).

3 See Irwin Kirsch, Henry Braun, Mary Louise Lennon, and Anita Sands, Choosing our Future: A Story of Opportunity in America (Princeton, NJ: Educational Testing Service, 2016); and Walter W. McMahon, "The Social and External Benefits of Education," in International Handbook of the Economics of Education, eds. Geraint Johnes and Jill Johnes (Cheltenham, UK: Edward Elgar Publishing, 2004).

4 See Daron Acemoglu and David Autor, "Skills, Tasks and Technologies: Implications for Employment and Earnings," in Handbook of Labor Economics, Vol. 4, eds. Orley Ashenfelter and David E. Card (Amsterdam: Elsevier, 2011), 1043–1171; and David Autor, The Polarization of Job Opportunities in the U.S. Labor Market, Hamilton Project, Brookings Institution, Washington, DC, 2010.

5 See David J. Deming, The Growing Importance of Social Skills in the Labor Market, NBER Working Paper No. 21473, August 2015, https://doi.org/10.3386/w21473; Richard V. Reeves, Joanna Venator, and Kimberly Howard, The Character Factor: Measures and Impact of Drive and Prudence, Center on Children and Families, Brookings Institution, October 2014, https://www.brookings.edu/wp-content/uploads/2016/07/22_character_factor_opportunity_reeves.pdf; Emma Garcia, The Need to Address Noncognitive Skills in the Education Policy Agenda, Education Policy Institute, Briefing Paper No. 386, December 2014, http://www.epi.org/files/2014/the-need-to-address-noncognitive-skills-12-02-2014.pdf.

6 Claudia D. Goldin and Lawrence F. Katz, The Race between Education and Technology (Boston: Harvard University Press, 2008).

7 The most recent round of projections prepared by the U.S. Bureau of Labor Statistics suggests that professional, technical, and management (PTM) employment will grow by 10 percent—double the rate of employment in all other occupations. PTM occupations are projected to account for more than one-half of the total rise in U.S. employment through 2024. See Andrew Hogan and Brian Roberts, "Occupational Employment Projections to 2024," Monthly Labor Review, December 2015.

8 See U.S. Bureau of Labor Statistics, "Usual Weekly Earnings of Wage and Salary Workers Fourth Quarter 2014," news release, January 21, 2015, https://www.bls.gov/news.release/archives/wkyeng_01212015.pdf.

9 The Pew Research Center found similar long-term earnings trends among the 25- to 32-year-old population. Pew Research Center, "The Rising Cost of Not Going to College," February 2014, http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/.

10 Camille L. Ryan and Kurt Bauman, Educational Attainment in the United States: 2015, Current Population Reports: Population Characteristics, P20-578 (Washington, DC: U.S. Census Bureau, March 2016).

11 White House, "Fact Sheet: President Obama Announces High School Graduation Rate Has Reached New High," news release, October 17, 2016, https://www.whitehouse.gov/the-press-office/2016/10/17/fact-sheet-president-obama-announces-high-school-graduation-rate-has.

12 U.S. Bureau of Labor Statistics, "College Enrollment and Work Activity of 2015 High School Graduates," news release, April 28, 2016, https://www.bls.gov/news.release/archives/hsgec_04282016.pdf.

13 See The Nation's Report Card: 2015 Mathematics and Reading Assessments, https://www.nationsreportcard.gov/reading_math_g12_2015/.

14 Madeline J. Goodman, Anita M. Sands, and Richard J. Coley, America's Skills Challenge: Millennials and the Future (Princeton, NJ: Educational Testing Service, 2015), https://www.ets.org/s/research/30079/asc-millennials-and-the-future.pdf.