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Education, earnings and skills: a multi-country comparison

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Author Info

  • Kevin Denny

    (Institute for Fiscal Studies and University College Dublin)

  • Colm Harmon
  • Vincent O'Sullivan

Abstract

This paper uses the measures of basic skills (or functional literacy) in the International Adult Literacy Survey to examine the impact of education and basic skills on earnings across a large number of countries. We show that the estimated return to formal education is sensitive to the inclusion of these measures: excluding them biases the return to education upwards in many countries to a significant degree, usually 1 or 2 percentage points. In almost all countries, the test scores have a well-determined effect on earnings although there is considerable variation in the size of the effect. The highest returns to skills tend to be in English speaking countries. Comparing results across countries, the returns to education and the returns to basic skills are not correlated. The evidence suggests that there is considerable benefit in many countries for policy intervention to increase the skill levels of workers. This should not just be directed at dealing with low-skilled individuals – there are gains across the skills distribution.

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File URL: http://www.ifs.org.uk/wps/wp0408.pdf
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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W04/08.

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Length: 28 pp
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:ifs:ifsewp:04/08

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References

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  1. Stewart, Mark B, 1982. "On Least Squares Estimation when the Dependent Variable is Grouped," The Warwick Economics Research Paper Series (TWERPS) 207, University of Warwick, Department of Economics.
  2. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  3. Francisco L. Rivera-Batiz, 1992. "Quantitative Literacy and the Likelihood of Employment among Young Adults in the United States," Journal of Human Resources, University of Wisconsin Press, vol. 27(2), pages 313-328.
  4. McKinley L. Blackburn & David Neumark, 1991. "Omitted-Ability Bias and the Increase in the Return to Schooling," NBER Working Papers 3693, National Bureau of Economic Research, Inc.
  5. Richard Blundell & Lorraine Dearden & Barbara Sianesi, 2003. "Evaluating the impact of education on earnings in the UK: Models, methods and results from the NCDS," IFS Working Papers W03/20, Institute for Fiscal Studies.
  6. William W. Gould & Jeffrey Pitblado & Brian Poi, 2010. "Maximum Likelihood Estimation with Stata," Stata Press books, StataCorp LP, edition 4, number ml4, April.
  7. Denny, Kevin & Harmon, Colm & Lydon, Raemonn, 2002. "Cross Country Evidence on the Returns to Education: Patterns and Explanations," CEPR Discussion Papers 3199, C.E.P.R. Discussion Papers.
  8. John Cawley & Karen Conneely & James Heckman & Edward Vytlacil, 1996. "Cognitive Ability, Wages, and Meritocracy," NBER Working Papers 5645, National Bureau of Economic Research, Inc.
  9. Green, David A. & Craig Riddell, W., 2003. "Literacy and earnings: an investigation of the interaction of cognitive and unobserved skills in earnings generation," Labour Economics, Elsevier, vol. 10(2), pages 165-184, April.
  10. John Cawley & James Heckman & Edward Vytlacil, 1998. "Understanding the Role of Cognitive Ability in Accounting for the Recent Rise in the Economic Return to Education," NBER Working Papers 6388, National Bureau of Economic Research, Inc.
  11. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  12. Boissiere, M & Knight, J B & Sabot, R H, 1985. "Earnings, Schooling, Ability, and Cognitive Skills," American Economic Review, American Economic Association, vol. 75(5), pages 1016-30, December.
  13. Colm Harmon & Hessel Oosterbeek & Ian Walker, 2003. "The Returns to Education: Microeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(2), pages 115-156, 04.
  14. Kevin Denny & Colm Harmon & Dorren McMahon & Sandra Redmond, 1999. "Literacy and Education in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 30(3), pages 215-226.
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Citations

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Cited by:
  1. Oscar Marcenaro Gutierrez & Anna Vignoles & Augustin de Coulon, 2007. "The Value of Basic Skills in the British Labour Market," CEE Discussion Papers 0077, Centre for the Economics of Education, LSE.
  2. J nos Kollo, 2013. "Patterns of Integration: Low Educated People and their Jobs in Norway, Italy and Hungary," Budapest Working Papers on the Labour Market 1315, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Mañé Vernet, Ferran, 2010. "El retorno a las competencias para los titulados universitarios catalanes," Working Papers 2072/179591, Universitat Rovira i Virgili, Department of Economics.
  4. Eric A. Hanushek & Ludger Woessmann, 2010. "The Economics of International Differences in Educational Achievement," NBER Working Papers 15949, National Bureau of Economic Research, Inc.
  5. Kollo, Janos, 2013. "Patterns of Integration: Low Educated People and their Jobs in Norway, Italy and Hungary," IZA Discussion Papers 7632, Institute for the Study of Labor (IZA).
  6. Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2012. "Literacy, Numeracy and Activation among the Unemployed," Research Series, Economic and Social Research Institute (ESRI), number RS25.
  7. Vincenzo Scoppa, 2007. "Quality of Human and Physical Capital and Technological Gaps across Italian Regions," Regional Studies, Taylor & Francis Journals, vol. 41(5), pages 585-599.
  8. Silva, Olmo, 2009. "Some Remarks on the Effectiveness of Primary Education Interventions," IZA Policy Papers 5, Institute for the Study of Labor (IZA).
  9. Concetta, MENDOLICCHIO, 2005. "Gender and private returns to education : a cross-European analysis," Discussion Papers (ECON - Département des Sciences Economiques) 2005056, Université catholique de Louvain, Département des Sciences Economiques.
  10. Mañé Vernet, Ferran & Miravet, Daniel, 2010. "An investigation on the pay-off to generic competences for core employees in Catalan manufacturing firms," Working Papers 2072/179595, Universitat Rovira i Virgili, Department of Economics.
  11. Marc Piopiunik, 2011. "Microeconometric Analyses of Education Production in Germany," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 40.
  12. Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2012. "Literacy and Numeracy Difficulties in the Irish Workplace: Impact on Earnings and Training Expenditures," Research Series, Economic and Social Research Institute (ESRI), number RS27.

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