Skills and wage inequality across labour markets

by Dirk Van Damme
Head of the Innovation and Measuring Progress division, Directorate for Education and Skills

Mean monthly earnings in USD (using Purchasing Power Parities) of individuals, by literacy proficiency level, gender, age and educational attainment (2012)

In a completely open labour market, earnings from employment would compensate individuals for their contribution to the organisation’s economic success. The price put on one’s labour also depends on the abundance or scarcity of the individual’s specific set of skills in the market. But economic price-setting mechanisms do not operate in a vacuum, and are heavily influenced by political and institutional factors that, in themselves, are often the outcome of long histories of social conflict and compromise.

Governments tend to regulate minimum wages and other framework conditions, while sectoral collective labour agreements set rules for salary increases by seniority or educational qualifications. Such arrangements serve to set minimum wages and living standards for vulnerable workers. In fact, some of the rationales underlying wage differentials across the labour market are increasingly scrutinised for their harmful social impact. For example, several countries are debating the social and economic impact of regulations favouring older workers simply because of their age.

It has now been well established that wage inequality has increased. Increasing social inequality also seems to have an adverse impact on growth. Even if inequality and well-being should be seen as multi-dimensional, incorporating many more factors than just wages, the income generated from employment lies at the core of social inequality. The latest Education Indicators in Focus, presenting data from the Survey of Adult Skills (a product of the OECD Programme for the International Assessment of Adult Competencies, or PIAAC), presents a snapshot of how different factors, such as gender, age, educational attainment and, especially, skills, affected the distribution of wages in 2012. The snapshot doesn’t provide trend data, but shows where we are now.

As the chart above illustrates, on average across the 24 countries and regions that participated in the survey, the wage differences between various categories are significant. Gender, age and educational attainment all have an impact on wages. Labour markets and wage-setting systems tend to closely reflect educational qualifications, often through institutional frameworks. Wages also reward professional experience and seniority of older workers. And the gender bias in wages partly echoes different labour market participation patterns between males and females.

But the most interesting finding of the chart is the very significant impact that skills have on earnings within each category of the gender, age and education variables. Skills differentiate wages to an almost similar degree within both sexes. With age we see a different pattern: as people grow older, their wages depend more and more on their skills level. But the wage differentiation only happens at the top of the skills distribution: higher skilled older workers earn higher wages than younger colleagues, while lower skilled workers don’t see their wages increase with age.

The interaction between educational qualifications and skills in setting wages again, is of a different nature. Labour market arrangements are still heavily based on educational qualifications. But educational qualifications do not always accurately describe the qualification-holder’s level of skills. Wages vary widely, even within each qualification level, by the actual skills people have; this is especially evident among tertiary-educated workers. If an individual is not equipped with a set of skills commensurate with his or her qualification, then the qualification in itself does not seem to secure a high wage. Better-skilled individuals with a mid-level qualification earn more than low-skilled tertiary graduates. At the same time, tertiary educated workers with low skills still get a higher wage than mid-skilled workers with lower qualifications.

Several countries are in the process of reforming their labour market arrangements. In general, such reforms aim to open up labour markets with more flexible arrangements, while at the same time protecting vulnerable workers and containing the overall level of wage inequality. In this context, the question whether skills and experience should have a higher impact on wages than seniority, gender or educational qualifications is becoming a critically important policy issue.

Links: 
Education Indicators in Focus, issue No. 27 by Eric Charbonnier and Simon Normandeau
Education Indicators in Focus, issue No. 27, French version
OECD Skills Outlook 2013
On this topic, visit:
Education Indicators in Focus: www.oecd.org/education/indicators 
On the OECD’s education indicators, visit:
Education at a Glance 2013: OECD Indicators: www.oecd.org/edu/eag.htm
Chart source: © OECD

Is expanding access to higher education worth the price?

by Dirk van Damme

Head of the Innovation and Measuring Progress division, Directorate for Education and Skills

As Education at a Glance 2014  found, education systems continue to expand and levels of educational attainment continue to rise throughout the world. Across OECD countries in 2012, 32% of 25-64 year-olds – over 220 million individuals – held a tertiary degree. Among young adults, the proportion is even higher: 40%. Never before have so many people attained that level of education. Just 12 years earlier, only 22% of 25-64 year-olds had a tertiary education. The tertiary attainment rate among 25-34 year-olds grew by an average of 3.4% per year between 2000 and 2012, and in most countries, it is not likely to slow down anytime soon.

Such a rapid increase in both participation  and completion rates for tertiary studies puts a huge stress on countries’ education systems and governments’ capacity to support tertiary educational institutions. Indicators on expenditure show that between 2000 and 2011 countries had to allocate a higher percentage of national wealth (measured as a proportion of GDP) to tertiary education: from 1.3% to 1.6%. In general, this increase allowed countries not only to compensate for the increasing numbers of students, but also to increase, however slightly, expenditure per student. Between 2008 and 2011, in the midst of the global economic crisis, expenditure per students increased by 2.5% on average across OECD countries.

Obviously, some countries could not follow this pattern: during the same period, 11 countries had to cut expenditure per student. Others tried to avoid putting the increasing cost of tertiary education on public budgets by boosting the share of private spending, for example by raising tuition fees. Between 2000 and 2011, the share of public expenditure on tertiary education fell from 75.3% of total spending to 69.2%. Whatever the source of funding, societies had to boost their investments in tertiary education.

But, in the end, are the additional expenses of families and taxpayers, the time and energy of students and families, and the efforts of universities to adapt their educational processes worth it? Some commentators doubt it; they point to the risk of over-schooling, of skills mismatches, of high-qualified workers stealing the jobs of mid- and low-qualified adults. Some governments want to contain the increasing numbers of students and build the case for a more selective tertiary education system. Others argue that the economic transformation in most OECD countries points towards an increased demand of the kind of skills that universities tend to supply, and that countries had better be prepared by producing a highly qualified workforce for the next decades. It is not easy to settle this debate, and realities differ across countries. But Education at a Glance provides a range of data that can inform the debate.

One way of looking at this is to compare the wage premium for tertiary educated individuals across countries and relate this to the level of tertiary attainment. The wage premium is not a perfect measure of the demand for tertiary-educated workers, since it is also influenced by the overall wage inequality in a country. Not all countries are alike in the way the market rewards highly educated people. For example, the wage premium tends to be relatively high in the more open and market-oriented economies like the United States or the United Kingdom. In contrast, more egalitarian Nordic countries have a compressed wage structure where the relative wage premium for higher educational attainment is lower.

But despite these differences, we still can investigate the overall relationship between the two indicators. Does the share of tertiary-educated people affect the wage premium for young tertiary- educated workers who are just entering the labour market? Are countries that have allowed their tertiary education systems to expand at a rapid pace, and have thrown huge numbers of tertiary-educated people onto the labour market, jeopardising the economic return of investment in a tertiary qualification for younger workers? If the labour market were to be saturated with highly schooled individuals, one would expect relatively small earnings differences between tertiary- and upper secondary-educated workers. The chart above plots countries against the tertiary attainment rate among adults and the current wage premium for tertiary-educated 25-34 year-olds.

The few countries in the lower left quadrant have relatively low rates of tertiary attainment and they also demonstrate a relatively low wage premium. In the case of Greece, it is clear that the economy is in such bad shape that the comparative scarcity of highly qualified workers does not lead to better pay. In the upper right quadrant we find countries that have high educational attainment rates and that also reward those people well, mainly because of their relatively wide distribution of wages.

In the upper left part of the chart we see countries that have seen huge increases in tertiary attainment and that might face the risk of relative overschooling. But several of these countries are welfare state-type economies with relatively low wage inequalities, and where the wage premium of tertiary education is comparatively low anyway. In the lower right section we find countries that are more hesitant to increase the share of highly educated people in the working population, but pay them well. Over time, these countries might be faced with an undersupply of highly educated people should the economy continue to develop a demand for them.

Overall, the pattern suggests that having more highly educated adults in the labour force might reduce access to higher wages for younger, tertiary-educated adults who are just entering the labour market. But the relationship is not particularly strong, and is heavily influenced by the outliers. Institutional arrangements in national labour markets also affect countries’ position on the chart. Countries have their unique ways of preparing a highly skilled workforce for the future economy. Some favour a strict approach, producing just the amount of skills the market requires now. Others try to fuel innovation and productivity by oversupplying the economy with higher-level skills. Many others refrain from steering demand for education at all; their education systems simply respond to demand. At this point, it is impossible to say who is right and who is wrong.

Links:

Education at a Glance 2014: OECD Indicators 

• Download the publication
• Download the highlights
• Read free online
• Explore a selection of core indicators from Education at a Glance 2014 using the Education GPS

Chart source: OECD Education at a Glance 2014: Indicators A1; A6