Wednesday 23 March 2016

Why do we bother with skills?

Marguerita Lane, a Senior Economic Consultant at London Economics, looks at the impact of literacy, numeracy and computer skills on earnings and employment outcomes

We expect skills in numeracy, literacy and ICT to be rewarded in the workplace through higher earnings and better employment opportunities. The 2012 Survey of Adult Skills confirms that this is the case. But can improvements in skills compensate for having a lower level of formal education? A new study by London Economics for the OECD finds that the answer depends on the type of skill under consideration – literacy, numeracy or ICT.

The distinction between qualifications and skills may not be immediately obvious. In a recent CVER blog “Why do we bother with qualifications?”, Simon Field describes the interesting relationship between (predominantly academic) qualifications and skills. For instance, although employers trust qualifications such as a university degree to provide some evidence of an individual’s underlying ability and skills, there can also be large variation in the levels of skills between individuals with the same level of formal education. 

Labour market returns
Unsurprisingly, for a given level of skills, when we compare individuals with higher levels of qualifications to those with lower levels of qualifications – for instance, upper secondary education (equivalent to GCE A-level) versus below upper secondary education (equivalent to 5 or more GCSE A*-Cs) – those with the higher levels of qualifications are likely to earn more on average and more likely to be in employment. The earnings and employment effects associated with qualification attainment are generally large. These findings should not come as a surprise, as part of what motivates people to study in the first place is the promise of returns in terms of higher earnings and better employment opportunities.

How then do the returns to skills compare with the returns to formal qualifications? London Economics’ research for the OECD finds that the answer differs depending on the type of skill under consideration.

Returns to literacy and numeracy
For a given level of qualifications, in the case of both literacy and numeracy, we find that even relatively modest increases in skills proficiencies are associated with labour market benefits. In addition, the skills premium is greater as the level of formally recognised qualification increases. Improvements in literacy and numeracy skills appear to narrow the labour market outcomes gap between individuals with different levels of formal qualifications (e.g. the gap between those with GCE A-levels and those with a 5 or more GCSEs A*-C) but they do not close it completely.

Returns to ICT
However, we also find that there is an even greater return to ICT skills at each level of formally recognised qualification, to the extent that ICT skills can sometimes entirely compensate for lower levels of qualifications in terms of earnings and employment outcomes. The finding of greater returns to ICT skills may result from a difference between the acquisition of ICT skills, which often occurs outside of the formal schooling setting, and the acquisition of literacy and numeracy skills which are generally the focus of the formal schooling system. The fact that ICT skills are not ‘wrapped up’ in formally recognised qualifications as frequently as literacy and numeracy are, might be one of the reasons why ICT skills are so strongly rewarded in the labour market, for a given qualification level.

Policy implications
The results suggest that there may be a relatively high return to improvements in ICT skills. However, the nature of this form of skills acquisition – and in particular the fact that for many individuals these skills are not acquired through the formal education process – poses a challenge to policy makers in terms of how they might practically implement interventions aimed at improving ICT skills.

Lane,M. and G. Conlon (2016), "The Impact of Literacy, Numeracy and Computer Skills on Earnings and Employment Outcomes", OECD Education Working Papers, No. 129, OECD Publishing, Paris.

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