Skill effort: A new theoretical perspective on the relation between skills, skill use, mismatches, and wages

Mismatches between workers’ skills and job demands have large negative effects on productivity, job satisfaction, and other outcomes. Current approaches to measure the impact of skills and skill mismatches on wages fail to specify the mechanism through which skills and mismatches may affect productivity. In this paper, we develop a new perspective by integrating skill proficiency and skill use into a new concept called skill effort. Skill effort is defined as a multiplicative function of skill proficiency and skill use. The intuitive understanding of this concept is that a skill can have no effect on productivity if it is not used and, vice versa, use of a skill is moderated by the skill proficiency level. The new concept is firmly rooted in use-it-or-lose-it, engagement, and self-efficacy theories and has a parallel in previous theories on performance. The theoretical breakthrough is that the concept of skill effort explicitly specifies the mechanism through which skills affect wages. Standard wage models (whether based on educational or skill variables) do not explicitly take this mechanism into account. In the skill effort model, skills can only affect wages if they are put to productive use. In the paper we show that this is indeed the case: there is no effect of proficiency level on wages, other than through the use of these skills. In the paper we use this concept to develop a skill matching model using data on numeracy proficiency from the Programme for the International Assessment of Adult Competencies. We apply a realized matches approach to turn the skill effort model into three components: the effect of required skill effort, the effect of overperformance and the effect of underperformance. This model explains 29% of the variance in wages, which is much higher than the 23% found in alternative skill mismatch models. Moreover it not much lower than a standard educational mismatch model that explains 31% of the variance in wages. As education imparts more skills than just numeracy, this is in fact an indication that the developed skill mismatch model is very good. We discuss remaining issues on the measurement of this concept and present different ways to address them.