Links between literacy and numeracy and labour market

Links between literacy and numeracy and labour market outcomes Anthony Shomos Productivity Commission Australian Conference of Economists 29 September 2009 Productivity Commission

Outline of presentation • Background and motivation for the project • Data used • How do literacy and numeracy skills vary across demographic groups? • Modelling the effects of skills on: Ø Labour force participation Ø Wages • Summary and future research Productivity Commission 2

Motivation and background • Policy interest in human capital effects on labour market outcomes Ø Participation & productivity • Literature (for Australia) is scarce Ø Much is known about effect of a person’s education, but not actual skills • Uses recent and comprehensive survey data Productivity Commission 3

Adult Literacy and Lifeskills Survey (ALLS) • ALLS Ø 2006 data, almost 9000 respondents Ø Subjective measures and objective tests on skills • Links to other surveys Ø 1996 ABS survey for Australia Ø Part of an international survey (inc. US, NZ, Canada, Italy, Sweden) Productivity Commission 4

Literacy and numeracy data in ALLS • Document literacy Ø locate and use info (maps, tables, job app’s) • Prose literacy Ø understand use info from text (news, brochures) • Numeracy Ø respond to mathematical demands of situations • Problem solving Ø Goal-directed thinking when no routine procedure • Health literacy Ø Use info related to health issues (drugs, first aid, staying healthy) Productivity Commission 5

Measuring literacy and numeracy • Tests for each skill give a ‘score’ (1 to 500) • Score converted to a level (1 to 5) • Skill level 3 is the: “minimum required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy” Productivity Commission 6

Profile of skills in Australia, 2006 Productivity Commission 7

Average document literacy skill level Document literacy improved over last decade Productivity Commission 8

Skills vary by demographic group • Education • Immigrant status Ø Country of birth • Labour market status Ø Participation • Skills of those in LF > those Not in LF Ø Wages • Skill level 1: $19. 70 per hour • Skill level 4/5: $32. 20 per hour Productivity Commission 9

Literacy declines with age and LF withdrawal Productivity Commission 10

Document literacy skill, by qualification and year Productivity Commission 11

Estimating the effect of skills on labour force participation • Logit model (Chiswick, Lee and Miller 2003) • LFP = 1 if in labour force, 0 otherwise • Ed = education • X = other explanatory variables • β 1 = direct effect of education on LFP Productivity Commission 12

Variables used in estimation • Educational attainment Degree +: Postgraduate, bachelor Ø Diploma/certificate: Diploma, Certificate III/IV Ø Year 12 Ø Year 11 or lower: including Certificate I/II Ø • Lit. Num 1 st principal component for document, prose and numeracy Ø Representative skill index. Range of 1 to 4/5 used. Ø • Other explanatory variables (X) Ø married, kids, city, country of birth, physical & mental health score, potential work experience Productivity Commission 13

Marginal effects of skills and education on labour force participation Productivity Commission 14

Including skills changes the magnitude of MFX for some variables Sample: Women 25 64 Educ only With skills Degree or higher 0. 1867 *** 0. 1471 *** Diploma/Certificate 0. 1286 *** 0. 1055 *** Year 12 0. 0794 *** 0. 0556 *** Age 0. 1002 ** 0. 1013 ** 0. 2865 *** 0. 2894 *** Age cubed 0. 2626 *** 0. 2641 *** Child 0 – 4 0. 2076 *** 0. 2147 *** Child 5– 14 0. 0752 *** 0. 0748 *** COB: Non English speaking 0. 0997 *** Age squared Physical health 0. 0093 *** Mental health 0. 0047 *** 0. 0495 ** 0. 0088 *** 0. 0044 *** significant at 1 per cent, ** 5 per cent and * 10 per cent Productivity Commission 15

Estimating the effect of skills on wages • 1. OLS regression, for employed persons Ø Estimated with and without skills • 2. Heckman 2 step model, to control for sample selection bias Ø Results show no statistically significant effect of sample selection bias Productivity Commission 16

Wages model – Marginal effects Productivity Commission 17

Other wage model results • Effect of including skills variable Reduced MFX of education by almost 50 per cent for men (a third for women) Ø COB (non-English speaking) had a negative effect on wages. But, reduced by 25 to 50 per cent Ø Negligible change for ‘experience’ Ø Productivity Commission 18

Areas for further research • Potential modelling issues? Endogeneity – skills and participation • What factors affect skills? Ø Joint estimation of: wages and skills Ø Lit/Num ~ F (Ed, Exp, Parents Ed, COB) Ø Productivity Commission 19

Summary and implications • Improving skills leads to a large, statistically significant increase in participation and wages Differences between genders Ø Education and country of birth effects reduced with skills included in ‘traditional’ HC models Ø But results do not control for innate ability Ø • Policy implications Improving skills, not just education, important for participation and productivity Ø Identify factors which affect skills Ø Productivity Commission 20

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Skills increase with years of education Productivity Commission 22

Document literacy varies according to occupation Productivity Commission 23