Abstract
AbstractHanushek et al (2015, ‘Returns to Skills Around the World: Evidence from PIAAC’, European Economic Review 73: 103) find a weak wage–skill relationship in countries with limited skill reward possibilities due to high union density, strict employment protection, and large public sector. If these factors also restrict employment possibilities and the incentives to join the labor market, a possible mirror image of the weak wage–skill relationship is a steeper employment–skill gradient. We use PIAAC data to estimate the employment–skill association, and the results for the whole sample of individuals give some indication that the employment–skill gradient is steeper in countries with strict employment rules and centralized bargaining. Our results for subgroups show imprecisely estimated employment–skill gradients for immigrants. For individuals with poor health conditions and low formal education, the estimated gradient is somewhat higher than in the whole sample in countries with high bargaining coverage, a large public sector, and centralized collective bargaining systems.
Highlights
Workers’ skills are key determinants of economic growth in modern economies
This paper exploits the rich comparable micro cross-country skill data provided by PIAAC to investigate the association between employment propensity and skills across countries with different labor market institutions
Whereas results vary somewhat between specifications, for the whole sample of individuals, most of our regressions indicate that the employment–skill gradient is steeper in countries with strict employment protection rules, high bargaining coverage, and centralized collective bargaining systems
Summary
Workers’ skills are key determinants of economic growth in modern economies. Empirical micro studies have traditionally considered the relationship between wages and skills as measured by formal education, usually years of education (Mincer equations), whereas research at the macro level has analyzed the relationship between GDP growth and aggregate country level of formal education. A mirror image of the weak relationship found between skills and wages in countries with strong trade unions, large public sectors, and strict employment protection laws may appear as a stronger relationship between skills and employment propensity in such countries in general and in particular for vulnerable groups in the labor market. Compared with earlier studies, our paper contributes to the literature by exploiting the rich comparable micro cross-country data provided by PIAAC linked with information on labor market institutions to investigate how the employment–skill gradient varies across a relatively large number of countries with different institutions. This section gives a broad overview of the possible mechanisms through which labor market institutions can affect the employment–skill gradient directly or indirectly through the wage-setting system and government interventions in the labor market
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