Skills are central to productivity growth and earnings. Studies find variations in human capital account for a large share of variations in economic growth. But, what is skill? How should we measure the levels of human capital in an individual and in a country? Until recently, the primary measures of skill were years of schooling and work experience. In fact, tests of human capital theory relied exclusively on these two measures. Hundreds of studies have estimated the benchmark earnings equation linking percentage differences in earnings to years of schooling, years of work experience, and the square of years of work experience.
Although these equations have a reasonably good record of predicting earnings, economists have long realized that schooling and work experience are proxies for the skills that actually contribute to productivity, including cognitive skill, general employability skills, and occupational skill. Recently, with the availability of data on tests of skills in math, science, and reading comprehension for the work force as a whole, new studies are reexamining the link between skills, earnings, and economic growth. In their analyses of differences in economic growth across countries, Hanushek and Wößmann (2008, 2012) find that cognitive skills are far more important than the amount of schooling. Others find that the non-cognitive gains from educational attainment appear to be important too, above and beyond the individual’s cognitive skills. For example, workers with a high school diploma and with a GED involving fewer years of schooling have similar test scores on cognitive skills. Yet, those with a high school diploma do far better in the work force.
In the U.S. context, both researchers and policymakers still rely mostly on educational attainment as the measure of skill of the work force. In a widely cited book, Katz and Goldin (2008) focus on the slowdown in the growth of schooling and argue that speeding up economic growth and reducing wage inequality require a more rapid growth in educational attainment. Central to President Barack Obama’s education agenda is the goal that by 2020 the U.S. again becomes the international leader in the share of the population completing a BA degree. At the same time, the last two Administrations have emphasized student testing of cognitive skills, thus highlighting the direct role these skills play in the economy and worker earnings.
This paper draws on a rich, new source of data to reexamine the respective roles of cognitive skills, problem-solving skills, years of schooling and other factors in determining earnings within the U.S. We ask several questions, including:
• How do the results of tests of cognitive skills vary across and within educational levels?
• Do cognitive skills affect earnings, over and above the effects of educational attainment?
• Does educational attainment still influence earnings, after taking account of cognitive
• Which cognitive skills—math, reading, or problem-solving—matter most?
• Does the influence of cognitive skills come entirely from helping people get into high pay occupations or do differences in cognitive skills affect earnings differences within fields?
• Does the role of cognitive skills in affecting earnings differ for men and women?
The measured levels of skill proficiency in the U.S. are low relative to those in many other OECD countries. Low proficiency in literacy, numeracy and problem-solving can be found in all demographic groups – young and old, male and female, native-born as well as immigrant, and even at higher rungs on the educational and occupational ladders. This analysis of PIAAC data on skill proficiency focuses on how these skills are rewarded in the U.S. labor market.
Several findings emerge from the analysis. First, the market generates quite strong rewards to literacy, problem-solving and especially numeracy proficiency. These returns can be found for all demographic groups, for those with low as well as high educational attainment, and in virtually every occupational group. Indeed, literacy and/or numeracy proficiency seem to be preconditions to other forms of more specific occupational training that are needed to advance within all parts of the job market. Second, the gains associated with reading and math proficiency vary widely across groups of workers. Older workers see the highest returns to numeracy while younger workers gain more from literacy. U.S.-born workers benefit a great deal from enhanced numeracy, even after controlling for education. Foreign-born workers see no benefit, once we take account of educational level.
Third, the effect of educational attainment on earnings leaves a great deal of earnings variation linked to proficient and high levels of numeracy and literacy. The patterns differ by educational level. Workers with “some college” see no significant earnings increases with higher levels of cognitive skills. But those with no more than a high school diploma experience markedly higher earnings when they are proficient in literacy and numeracy. A high school graduate who moves from low to proficient in both literacy and numeracy would be expected to obtain a job that pays almost $16,000 more per year. Numeracy skills are especially important for those with BA degrees. Over one in three (37 percent) of BAs are at the lowest proficiency in numeracy. The regression results suggest that raising these workers to proficient in numeracy would raise their earnings by $800 per month in added earnings.
Fourth, cognitive skills raise earnings among those with the same occupation, but not in all cases. For managers and professionals and for craft workers and machine operators, the gain comes from reaching proficient levels of numeracy. For technical and associate professions, added proficiency in literacy is valuable. But, for clerical, sales, laborers, and service workers, higher cognitive skills exert little impact on earnings. Of course, these estimates do not take account of the role of cognitive skills in finding a job in one of these occupations.
Overall, the skill measures compiled for PIAAC are indeed consequential and demonstrate that educational attainment offers only a partial indicator of skills relevant to the labor market. Given the woefully low levels of literacy and numeracy among U.S. workers, the evidence in this paper suggests that insuring more workers attain at least a proficiency skill level would go a long way in raising earnings and productivity.
Chosen excerpts by Job Market Monitor. Read the whole story at Cognitive skills in the US labor market: for whom do they matter?