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Faster national economic growth leads to higher returns to skills

Man and woman looking at computer monitor

A survey covering 32 countries provided data on cognitive and workplace skills needed for successful participation in 21st-century society and the global economy.

City of Seattle Community Tech
Jul 24 2017

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Research Spotlights

By Veronica Marian

What is the issue?

Economists have long believed that the more education a worker has, the faster he or she can adapt to a changing economy and that this explains the general observation that more skills lead to greater earnings. This hypothesis, however, has not been reliably tested in previous analyses.

New research by Eric Hanushek and his colleagues shed new light on the idea. After analyzing internationally comparable data from 32 countries, Hanushek says traditional analyses of the data have been misleading.

“For decades, economists have focused entirely on the number of years of schooling an individual receives,” said Hanushek, a SCID faculty affiliate and Stanford’s Paul and Jean Hanna Senior Fellow in Education. “In other words, the more years of schooling, the higher the returns to skills long term.”

That measure is faulty, he says, because the quality of schooling differs dramatically within and across countries. This makes just the number of years someone spends in school an unreliable indicator of lifetime earnings. On the other hand, the scholars found that adults’ proficiency in key information-processing skills like literacy, numeracy, and problem solving in technology-rich environments are much better measures of skills and do indeed lead to higher salaries. Moreover, the income gains from added skills are higher in economies that have larger economic changes.

Background

Hanushek and his team relied on the Programme for the International Assessment of Adult Competencies (PIAAC), a survey developed by the Organisation for Economic Development. The PIACC, which originally surveyed 24 countries, was expanded to include data from nine additional countries. This widened the range of countries surveyed, although data from lower income countries is still more limited.

The survey provides comparable data on “cognitive and workplace skills needed for successful participation in 21st-century society and the global economy.” It accomplishes this by measuring not only the individuals’ educational background, work experiences, and occupational attainment but also cognitive skills.

The data revealed how adults use their skills at home, at work, and in their wider communities, and was crucial in answering questions about how returns to skills are related to economic change.

Findings

It turns out that returns to skills are larger in faster growing economies, consistent with the hypothesis that skills are particularly important for adaptation to economic change.

“The new results indicate that returns to skills are even more diverse across countries than previously thought,” according to Hanushek and his team.  Moreover, the pattern of returns across countries is quite consistent with the economic growth and amount of economic change found in the various countries.

Policy implications

The results underscore the importance of developing high-quality schools in developing countries, Hanushek said. Once a country gets on a strong development path, its economy will be rapidly changing, which he says will require a workforce able to adapt to new industries and new ways of doing things.

Hanushek further points out that the results indicate there is a bonus to bringing up the quality of schooling across the country because it will also tend to improve the distribution of income.

Hanushek stresses that since data now shows that returns to skills vary across countries, it is possible to begin further assessment of how characteristics of the economies of different countries affect the returns to skills. In this way, it is possible to understand better the impact of different institutional policies relevant to different countries.