Skills and Earnings in the Full-Time Labor Market

Research on labor market gains associated with investments in human capital most frequently relies on years of schooling completed, or educational credentials, as a measure of human capital. Indeed, it is commonplace in speeches by college presidents to touch upon the increased earnings associated with a college education. Clearly, the claim is backed by strong evidence. Over the past four decades, the size of the average earnings advantage for completing a bachelor's degree has grown substantially. Large increases in college enrollment rates among young people have resulted — as have large increases in college tuition and fees and skyrocketing student debt. Yet while the gains from a college education can be quite large, that's not the whole story. Like any investment activity, the economic payoffs do not accrue to everyone. This paper raises the specter that, under some conditions, college enrollment may offer no economic benefit at all. Using newly available data on the literacy and numeracy proficiencies of American adults produced by the Survey of Adult Skills of the Programme for the International Assessment of Adult Skills (PIAAC), this paper examines the independent effects of three key measures of human capital — basic skills, educational attainment, and work experience — on the earnings of prime-age (25 to 54 years old), full-time employed workers in the United States. The study is designed to gauge the independent effect of each of these three measures of the human capital stock of workers on their earnings. In line with human capital theory, this study found a strong connection between earnings and each measure, with the details revealing strong gains for those with the most skills and education, but little or no gain, in one particular example, for those who fail to gain a bachelor's degree. PIAAC provides an unusual opportunity to gain insights into these complex relationships for prime-age, full-time workers. Data on the literacy and numeracy skills for a nationally representative sample are difficult and expensive to produce and are not widely available, whereas data on educational attainment are regularly produced by the U.S. Census Bureau's household surveys. In fact, researchers have tended to use educational attainment as a stand-in for more complete measures of a person's human capital because of its availability. Educational credentials, however, are not precise measures of basic skills proficiencies. For example, the reading and math scores of public high school graduates in Philadelphia vary enormously. Students from highly selective schools in the city of Philadelphia — where our Drexel University Center for Labor Markets and Policy is located — have the highest standardized test scores in Pennsylvania, while their counterparts enrolled in neighborhood high schools, just a mile or two down the road, have among the lowest. Using PIAAC data, we find large earnings advantages to basic skills even after statistically controlling for the effect of educational attainment and other worker background characteristics and job traits for prime-age, full-time workers. These findings indicate that basic skills are not only fundamental to achieving higher levels of educational attainment but are also directly rewarded in the labor market in the form of higher earnings.