Research Note: The Marginal Economic Value of an Additional Point of Literacy Skills on Wage Rates

Not all of DataAngel’s analysis ends up in published reports. Some of this material is nonetheless useful in that it offers unique insights into matters of crucial importance to policy.

The following research note uses data from the OECD’s 2011 PIAAC adult skill assessment for Canada to estimate the marginal value of an additional point of literacy to annual employment income.

Separate estimates of the marginal income return to an additional point of literacy for workers whose skill level falls below, and above, the proficiency level associated with their 4-digit occupation code in ESDC’s Essential Skills Profiles.

The initial pair of estimates are then adjusted to remove the effect of a range of other variables known to influence incomes, including age, gender, educational attainment, Aboriginal status, immigrant status, mother tongue and province of residence. Together, skill and these variables explain most income variation in Canada. Other variables might have an influence on the estimated value of a literacy point but to have any appreciable impact said variable would have to be uncorrelated with both skill and the large number of other variables controlled for in the regression.

The analysis reveals a symmetrical pair of estimates.

The 40% of workers whose literacy skill level is below the minimum level notionally demanded by their occupation lose $61 in earnings per point of literacy that they are below the minimum threshold.

The 30% of workers whose literacy skill level is above the minimum level notionally demanded by their occupation gain $61 in earnings per point of literacy that they are above the minimum threshold.

Given that workers in occupational literacy skill shortage are 26 points below the minimum skill level demanded by their occupation, this implies an average income loss of an estimated $1526 per year, an amount roughly three times the income gained through productivity growth in the current period.

It is worth noting that the estimated impact of literacy skill on wages has fallen from $155 in 2003. This drop in value does not imply that literacy is any less important to economic performance but rather than improvements in the lower half of the literacy skill distribution provide less room for employers to discriminate wages on literacy skill.

So literacy skill is an important economic asset for individuals and a potential source of additional labour income, if a means can be found to reduce the proportion of the adult workforce in literacy skill shortage.

Reducing the proportion of the workforce in occupational literacy skill will not be simple. The most obvious route to reduction is to reduce the proportions of youth leaving the secondary and post-secondary systems. It will take at least a decade for meaningful numbers of higher skilled youth to enter the labour force even if the political will and means are found to improve skill levels.

So reducing the proportions of low skilled workers will require massive amounts of adult skill upgrading in the workplace.

Thanks to research undertaken by the federal government efficient, effective and affordable means are available to upgrade adult literacy skills . Our analysis of multiple assessment cycles for Canada suggests that persuading employers to make the required investments will be difficult. It seems that employers are reducing the actual cognitive skill demands of their jobs in response to high proportions of workers in literacy skill shortage and to avoid having to pay the rapidly rising real wages of workers with higher literacy skill levels that are in short supply. This reduction in the skill demands of jobs is precipitating a massive loss of skill by workers with the notional level of literacy skill demanded by their occupation and an equally large loss of labour income and output.

 

T. Scott Murray is a retired senior manager from Statistics Canada and President, DataAngel Policy Research Incorporated, a global specialist in education, skills and productivity.

T. Scott Murray
DataAngel Policy Research
Email: dataangel@mac.com
Web: www.dataangel.ca
Mobile: +1 613 240 8433

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