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

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:

2016-10-17 / Peter Fredriksson, Nationalekonomi
Wage return to education
Hanushek et al (2015)
Country avg.

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)

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:

2016-10-17 / Peter Fredriksson, Nationalekonomi
Wage return to skills
Hanushek et al (2015)
Country avg.

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)

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:

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.

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…

2016-10-17 / Peter Fredriksson, Nationalekonomi
Skills and labor market outcomes
OECD: Economic Surveys Sweden 2015

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?

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:

2016-10-17 / Peter Fredriksson, Nationalekonomi
Return to skills and wage dispersion
Hanushek et al (2015)

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:

2016-10-17 / Peter Fredriksson, Nationalekonomi
Position in the wage distribution and skills
Hanushek et al (2015)
Country avg.

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:

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)

2016-10-17 / Peter Fredriksson, Nationalekonomi
• Wage incentives to invest in higher education
matter, also in the Nordic countries
Fact 8:

2016-10-17 / Peter Fredriksson, Nationalekonomi
Wage incentives and educational choice
Fredriksson and Topel (2010)
Sweden US

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:

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)

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

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