Education and the wage structure
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Præsentation af professor Peter Fredriksson, Stockholms Universitet ved ROCKWOOL Fondens konference, Social mobilitet i Danmark: viden, udfordringer og løsninger, den 13. oktober 2016. Se videooptagelse af præsentationen på ROCKWOOL Fondens YouTube side: https://www.youtube.com/channel/UCaF51ld8toP4cGIStoQA0DQ
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Education and the wage structure
- 1. Education and the wage structure Peter Fredriksson Præsentationen blev givet på ROCKWOOL Fondens konference Social mobilitet i Danmark: viden, udfordringer og løsninger. Præsentationen og den efterfølgende debat kan ses på ROCKWOOL Fondens youtube kanal på følgende link: https://www.youtube.com/watch?v=LQ-Mbosk6lk
- 2. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Wage return to a year of schooling is lower in the Nordic countries than in most other countries (Wage return = the relative wage increase associated with an additional year of schooling) Fact 1:
- 3. 2016-10-17 / Peter Fredriksson, Nationalekonomi Wage return to education Hanushek et al (2015) Country avg.
- 4. 2016-10-17 / Peter Fredriksson, Nationalekonomi Limits to interpretation • But cross-country differences in wage/schooling relationships are a bit hard to interpret After all, educational systems are different A year of schooling does not have the same meaning across countries • Let’s look at (cross-country) comparable skills instead! (Data from PIAAC, 35-54 year-olds; pertain to 2011/12)
- 5. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Wage return to skills is lower in the Nordic countries than in most other countries (Wage return = the relative wage increase associated with an additional standard deviation of numeracy skills) Fact 2:
- 6. 2016-10-17 / Peter Fredriksson, Nationalekonomi Wage return to skills Hanushek et al (2015) Country avg.
- 7. Fact 3: Institutions matter • Wage returns to skills is lower when… Union density is high Employment protection is stringent And the public sector is large (returns lower in pub. sector) Private sector Public sector Hanushek et al (2015)
- 8. 2016-10-17 / Peter Fredriksson, Nationalekonomi • At the low-end of the skill distribution, wage returns underestimate the true return to skills • Why? • Because employment/non-employment margin responsive to skill • And particularly so in the Nordic countries Fact 4:
- 9. Employment and skills Note: Relationship b/w non-employment and skills, relative to non-employment by country. Source: Hanushek et al (2015), and OECD Employment data Country avg.
- 10. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Skill differences manifest themselves as: employment differences rather than wage differences to a greater extent in the Nordic countries To summarize…
- 11. 2016-10-17 / Peter Fredriksson, Nationalekonomi Skills and labor market outcomes OECD: Economic Surveys Sweden 2015
- 12. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Is lack of incentives a problem in the Nordic labor markets? • Possibly, but not obviously 1. Costs of acquiring education lower in the Nordic countries than in many other countries the compensating wage differential for acquiring education should also be lower 2. Also, a simple framework where wage differentials are explained by demand/supply of skills seem to work well also in the Nordic countries 3. Further, educational investments and the allocation of skills seem to respond to incentives in the Nordic countries Implications?
- 13. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Skill returns and wage dispersion go hand-in-hand (The return to every productive characteristic is higher in the US than in the Nordic countries) Fact 5:
- 14. 2016-10-17 / Peter Fredriksson, Nationalekonomi Return to skills and wage dispersion Hanushek et al (2015)
- 15. 2016-10-17 / Peter Fredriksson, Nationalekonomi • What about the relationship b/w skills and position in the wage distribution? • An increase in skills is associated with the same amount of upward mobility DK and US (In other words: A given move in the wage distribution commands a greater return in the US. As it should be, since costs associated with that move are greater in the US) Fact 6:
- 16. 2016-10-17 / Peter Fredriksson, Nationalekonomi Position in the wage distribution and skills Hanushek et al (2015) Country avg.
- 17. 2016-10-17 / Peter Fredriksson, Nationalekonomi • When the relative supply of high-skill workers is high (in comp. to demand) their relative wages are low (Analysis based on IALS – the predecessor of PIAAC) Fact 7:
- 18. 2016-10-17 / Peter Fredriksson, Nationalekonomi Supply of skills and wage differences NB: Net supply = supply – demand Relativewages(highvslowskilled) Relative net supply (high vs low skilled) Leuven et al (2004)
- 19. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Wage incentives to invest in higher education matter, also in the Nordic countries Fact 8:
- 20. 2016-10-17 / Peter Fredriksson, Nationalekonomi Wage incentives and educational choice Fredriksson and Topel (2010) Sweden US
- 21. 2016-10-17 / Peter Fredriksson, Nationalekonomi • Skill allocation across jobs is positively related to job-specific reward to skills (Skills measured using the 8 domains tested in the Swedish military draft) Fact 9:
- 22. 2016-10-17 / Peter Fredriksson, Nationalekonomi Allocation of skills across jobs Based on Table 2 in Fredriksson/Hensvik/Skans (2016) Uses variation across 8 different skill domains w/in job (some 25000 FE:s)
- 23. 2016-10-17 / Peter Fredriksson, Nationalekonomi Conclusions: The wage structure • Wage differentials are more compressed in the Nordic countries than in the US • Institutions matter, but wage differentials also driven by market forces (demand/supply) • When costs of acquiring skills are low, we should also expect wage differentials by skill to be low
- 24. 2016-10-17 / Peter Fredriksson, Nationalekonomi Remarks: Educational mobility and wage structure • Wage differentials and subsidies matter primarily for Number of individuals demanding, say, higher education But probably minor effects on who demands higher education • In admitting students to higher education, all countries screen students on (prior) achievement (GPA, SAT) • Challenge is to change the underlying relationship b/w school outcomes at the lower levels and family background
Notes de l'éditeur
- Let me begin by making the obvious point that the wage structure is an outcome It is market outcome; it is shaped by the policies we have, but it is not an object that the policy maker has direct control over So in a country that supplies high quality education at the low-end, you expect wage differentials by education to be smaller In a country that subsidizes higher education, you expect wage differentials to be smaller, since individuals will require a smaller compensating wage differential to make the investment This simple point is sometimes forgotten in the discussion on the incentives to invest in education With that said, I am going to review the cross-country facts on the wage return to skills and education I will give you 9 facts. Some are most likely well-known, others may perhaps convey some news… Sometimes this obvious point is forgotten when you here calls for the need for increasing the incentives to invest in skills Your reaction when you here such calls
- A number such as 0.042, means that a year of schooling is on avg. associated w. a rel. wage increase of 4.2% Denmark: 0.055 => 5.5% US: 11.7%
- SD:s since test scores does not have an obvious cardinal scale Skill differences by year of schooling tends to be high in the US, and much smaller in the Nordic countries Focus on numeracy skills for convenience
- SE (12.8%) still at the bottom; US (32%) still at the top. DK (14.7%) a climbed a couple of steps on the “ladder”
- Strictly we should be careful in ascribing causality, but it would be highly surprising if institutions did not matter at all
- Economists like to look at wages But do not give the full picture, primarily at the low-end
- To illustrate this point I am going to use some data for SE
- When we move across skill levels in SE wage differences are relatively small, but employment differences tend to be high
- What I want to do next is to present some evidence that relate to these three points
- A bit of a trivial point
- If costs are the same across countries, the pure wage returns are what we should care about If not, then positions also convey information Interpreted differently. A given move in the wage distr. should command a greater return since the costs associated with that move are greater in the US
- Position ranked 0/1 SD increase in skills is associated with a move in the wage distribution from the median to the 62nd percentile in the US and DK!
- SE: Only two swings in the data In SE the return is basically halved b/w late 60s and mid 80s. And university enrollment rates bottom out in the mid 80s
- Focus on the positive number Conclusion: When the job-specific return to a skill is high, then workers who do that job tend to be abundant in that skill Sorting by comparative advantage! Markets work (also in SE), although perhaps not perfectly