Abstract
Ample evidence indicates that a person’s human capital is important for success on the labor market in terms of both wages and employment prospects. However, unlike the efforts to identify the impact of school attainment on labor-market outcomes, the literature on returns to cognitive skills has not yet provided convincing evidence that the estimated returns can be causally interpreted. Using the PIAAC Survey of Adult Skills, this paper explores several approaches that aim to address potential threats to causal identification of returns to skills, in terms of both higher wages and better employment chances. We address measurement error by exploiting the fact that PIAAC measures skills in several domains. Furthermore, we estimate instrumental-variable models that use skill variation stemming from school attainment and parental education to circumvent reverse causation. Results show a strikingly similar pattern across the diverse set of countries in our sample. In fact, the instrumental-variable estimates are consistently larger than those found in standard least-squares estimations. The same is true in two “natural experiments,” one of which exploits variation in skills from changes in compulsory-schooling laws across U.S. states. The other one identifies technologically induced variation in broadband Internet availability that gives rise to variation in ICT skills across German municipalities. Together, the results suggest that least-squares estimates may provide a lower bound of the true returns to skills in the labor market.
Highlights
Human capital analysis starts with the assumption that human capital can be acquired through schooling and lifelong learning
Approximating an individual’s stock of human capital with years of schooling is especially problematic in cross-country comparisons, which implicitly assume that the contribution of each school year to human capital accumulation is independent of the quality of the education system—i.e., that a year of schooling, e.g., in Papua New Guinea creates the same increase in productive human capital as a year of schooling in Japan (Hanushek and Woessmann, 2008, 2015)
The idea that human capital is crucial for future prosperity is widely accepted today
Summary
Human capital analysis starts with the assumption that human capital can be acquired through schooling and lifelong learning. Approximating an individual’s stock of human capital with years of schooling is especially problematic in cross-country comparisons, which implicitly assume that the contribution of each school year to human capital accumulation is independent of the quality of the education system—i.e., that a year of schooling, e.g., in Papua New Guinea creates the same increase in productive human capital as a year of schooling in Japan (Hanushek and Woessmann, 2008, 2015). Measures of educational attainment just reflect an individual’s human capital at the end of formal schooling, which may not be good indicators of effective human capital when individuals need to constantly adapt their skills to structural and technological change throughout their entire working life
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