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

Preface

This paper is the first in a series of policy reports dealing with the impact of human capital investments on the U.S. labor market. It is part of a larger series of papers from the ETS Center for Research on Human Capital and Education that uses data from the Programme for the International Assessment of Adult Competencies (PIAAC) to better understand the relationship between human capital and opportunity in America today.

Neeta Fogg, Paul Harrington, and Ishwar Khatiwada, labor economists from Drexel University's Center for Labor Markets and Policy, dive deep into the rich data of PIAAC to examine three measures of human capital: educational attainment, cognitive skills, and work experience of prime-age (25 to 54 years old), full-time employed workers in the United States. Through detailed descriptive data and a host of multivariate regressions, the authors report the impact on earnings across each component of human capital. What they reveal is a complex and multifaceted story, one where the earning gains from additional levels of education can be large, but are not universally shared.

A central theme in this paper is that higher educational attainment largely translates to improved employment and earnings outcomes. For example, the earnings of full-time workers age 25 to 54 who dropped out of high school are 16 to 17 percent below the earnings of their peers who graduated high school, while those with a bachelor's degree see a 30 percent gain over high school graduates, and those with a master's degree are expected to earn around 45 percent more than high school graduates. However—and this is a critical caveat—these findings do not apply across all levels of higher education. In fact, the authors found no earnings advantages for those with a postsecondary certificate, or for those who attended college but did not earn a credential, when compared to high school graduates. Workers with an associate's degree had only a small earnings advantage over high school graduates.

Where the authors do find consistent—and strong—gains in labor market outcomes is in individuals' literacy and numeracy skill levels, reporting that the earnings of prime-age, full-time workers at every level of education increased with higher levels of literacy and numeracy skills. Their research indicates that a college education accounts for only part of the earnings premium of college-educated workers over high school graduate counterparts. The balance of the wage premium appears to be tied to cognitive skills, which are rewarded in the labor market because they improve worker performance.

Researchers and others tend to use educational attainment alone as the "stand-in" for human capital because of the wide availability of attainment data in public datasets. But as a measure, the authors argue, it is deeply imprecise and "far from a standardized product." Most importantly, it does not directly impart information on cognitive skills, but instead roughly aligns to an expectation of those skills—an expectation that appears to be increasingly dubious. The authors demonstrate this when they report that on the PIAAC literacy scale, some 36 percent of full-time, prime age workers with an associate's degree performed at low levels, as did some 18 percent of those with a bachelor's and 13 percent of those with a master's degree or higher. On the numeracy scale, the results were even more disappointing. Here the percentages with low skills ranged from nearly 50 percent among those with an associate's degree to 30 percent with a bachelor's to 20 percent with a master's degree or higher.

The contradiction between greater educational attainment levels and low skill proficiencies is also apparent in other research using PIAAC data published in our Center, as well as mirrored in analyses of the National Assessment of Educational Progress (NAEP, or "The Nation's Report Card") and the Organisation for Economic Co-operation and Development's Programme for International Student Assessment (PISA). In most cases and across core domains such as reading, math, and scientific literacy, we see aggregate skill levels among both student and adult populations that are either flat or in decline in spite of increases in educational spending and attainment.

Why do these contradictions remain despite increased awareness of the problem and despite the fact that we continue to invest in efforts to reduce poverty and improve schooling? Some believe the contradictions we see between attainment levels and skill levels have to do with the organization of the schools; others believe it has to do with inadequate spending and an unwillingness to take any major steps to make schools better. We at the Center for Research on Human Capital and Education have argued that while these are important factors related to the inequality we see in outcomes, a deeper problem has to do with the varied backgrounds and opportunities that children have before they enter school and the accumulation of disadvantages they experience from birth through the elementary and high school years.

From a policy perspective, as the authors say, when the goal is attainment, we run the risk of "overemphasizing policies designed to increase the level of educational attainment of the population with little regard to developing basic skills in that education process." Moreover, resources known to bolster skills may be overlooked for programs and policies that singularly promote attainment. This has stark social and economic consequences. Those who invest their effort, time, and money in the pursuit of postsecondary education anticipating an increase in their levels of human capital may be putting themselves and their future at risk. When this happens for many, it also puts society at risk.

Understanding the complex and interrelated dynamics associated with the development of human capital is a first and critical step toward improving the distribution of it in our population. It is this goal that we should be marshaling our resources to achieve.

Irwin Kirsch

Anita Sands

Center for Research on Human Capital and Education

References

ETS Center for Research on Human Capital and Education, related reports, https://www.ets.org/research/report/opportunity/.

Madeline Goodman, Anita Sands, and Richard A. 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.

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), https://www.ets.org/s/research/report/opportunity/ets-choosing-our-future.pdf.