Skills, qualifications and wages: An analysis from the Adult Literacy and Life Skills survey
This study used data from the Adult Literacy and Life Skills survey to look at the extent to which hourly wages can be explained by skills and qualifications across industries and occupations. Hourly wages can be viewed as a measure of employee productivity. The results show that qualifications and literacy and numeracy skills are both related to higher hourly wages. However, the effects differ across industries and occupation. In addition, age, gender and first-language also have an influence on wages.
Author(s): David Earle, Tertiary Sector Performance Analysis and Reporting, Ministry of Education.
Date Published: May 2009
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Recent studies have shown a positive relationship between the proportion of the workforce with higher-level tertiary qualifications and labour productivity. The Adult Literacy and Life Skills (ALL) Survey provides an opportunity to look at skill levels in literacy and numeracy, along with educational qualifications, and relate these to hourly wages within industries and occupations. Hourly wages can be viewed as a measure of employee productivity.
This study uses the ALL data to look at the extent to which hourly wages can be explained by skills and qualifications across industries and occupations. It addresses the following questions:
- Do employers value educational qualifications or skills or both?
- For employees with the same level of educational qualification, how much additional value is put on higher levels of literacy and numeracy?
- For employees with the same level of literacy or numeracy, how much additional value is put on having a higher level of education?
- Do some industries or occupations put greater value on literacy and numeracy than others?
The findings of this study are presented in three sections. The first looks at the distribution of literacy and numeracy skills for people in employment. The second looks at the distribution of hourly wages. The third presents results of regression models looking at the relationships of skills, qualifications, occupation and industry to hourly wages.
Skills of people in employment
The ALL survey measured English-language based skills across four domains: prose literacy, document literacy, numeracy and problem solving. For people in employment, these domains are highly correlated with each other. The largest differences in the scores of individuals were between numeracy and prose literacy and between numeracy and problem solving.
There is a moderate but definite relationship between skill levels in each of these domains and qualification level. The difference in score between those with no qualification and those with a bachelors degree represents just over one standard deviation of the score distribution for each domain.
The ALL tests were conducted in English, resulting in a noticeable difference in test scores for people with English as an additional language. These differences persist across educational levels and are larger for people who have a non-European language as their first language and/or immigrated to New Zealand as an adult.
Literacy and numeracy scores vary by age, with people aged 30 to 49 having the highest median scores.
People with the highest levels of skills are most likely to work in finance and real estate, professional and administrative services or education and training. People with the lowest levels of skills are most likely to work in primary industries, manufacturing, construction, retail and wholesale trade and health and social services.
In terms of occupation, people with the highest skill levels are most likely to work as administrators and managers, professionals or technicians and associate professionals. People with the lowest levels of skill are most likely to work as agricultural workers, plant and machinery operators and assemblers or labourers.
Hourly wages are related to both qualification levels and skills. The effect of having a tertiary qualification is to not only to increase median incomes but also to extend the relative range of income that it is possible to earn. Similarly, with skill levels, people with low skills have a relatively restricted range of hourly wages, compared to people with higher skills. A 50 point difference in skills (around one standard deviation) is associated with 20 percent difference in hourly wages. This is just slightly less than the differences in average wages between a person with no qualification and a person with a non-degree tertiary qualification.
People with English as an additional language are likely to earn less. This effect is evident across all qualification levels, but is greater for those with tertiary qualifications. This difference remains even once English-based literacy skills are accounted for. Immigrants with a non-European language as their first language earned less than immigrants with a European language as their first language, even once qualifications and English-based literacy skills were accounted for.
Overall, women have lower hourly wages than men. These differences also persist across qualification levels, with the smallest difference being at degree level. Average hourly wages increase with age up until the age of 45 and then decrease after that.
The distribution of hourly wages varies by industry. The highest median wages are in professional and administrative services and education and training. The lowest are in retail and wholesale trade. Wages also vary by occupation, with managers, professionals and technicians earning the highest wages, while agricultural workers earn the lowest. There is a small but distinct relationship between hours worked and hourly wages, with people working longer hours being more likely to be paid more per hour.
Relationship of skills and qualifications to wages
Wages can be explained by a number of factors. These include the characteristics of the individual, such as age and gender, as well as the combination of literacy and numeracy skills and educational qualification.
Characteristics such as age, gender, language and hours worked explain around 20 percent of the variation in hourly wages. Adding in literacy or numeracy skill explains 30 percent of the variation. If educational qualifications are considered instead of skills, then 34 percent of the variance can be explained. Considering both qualifications and skill level (in addition to the other characteristics) explains almost 40 percent of the variance in hourly wages.
When age, gender, first language, hours worked are controlled for:
- A one standard deviation increase in either prose literacy or numeracy results in just over a 10 percent increase in hourly wages (when holding qualifications constant)
- Given the same level of skills and compared with no qualification, a school-level qualification results in a 9 percent increase in hourly wages, a tertiary non-degree qualification in an 18 percent increase, a bachelors degree in a 38 percent increase and a postgraduate qualification in a 64 percent increase.
Having controlled for English-language prose literacy or numeracy skill and qualification level:
- Females are still likely to earn about 13 percent less than males – the difference being smaller when numeracy is controlled for (when holding all other factors constant)
- The increase in median wages from 25 to 35 years of age is similar to the effect attributable to gaining a tertiary non-degree qualification. The age period can be interpreted as representing the development of on-the-job experience.
- Native English speakers are still likely to earn 13 percent more than those with English with an additional language (when holding all other factors constant)
Taking the industry of employment into consideration adds some further explanation to hourly wages, in addition to individual characteristics, skills and qualifications. There are also interesting differences in the effect of skills and qualifications within industries.
When age, gender, first language and hours worked were taken into account:
- In agriculture, forestry and fisheries there is no premium for qualifications once prose literacy or numeracy is taken into account – with the premium for numeracy being higher than that for prose literacy
- In construction and education and training there is no premium for prose literacy once qualifications are taken into account. However, this is not the case is numeracy is taken into account. That is, numeracy is rewarded over and above educational qualifications in these industries
- In industries that have premiums for both skills and qualifications, prose literacy is most highly rewarded in professional and administrative services and numeracy is most highly rewarded in health and social services.
When skills and qualifications were taken into account:
- Females are likely to earn less than males in half of the industries – with the effect reduced when numeracy is taken into account
- Hourly wages increased from age 25 to 35 across all industries
- Native English speakers are likely to earn more than people with English as an additional language in four out of the ten industries.
Occupation provides a very strong predictor of wages. Adding skills and qualifications in addition to occupation doesn't add much further explanation, suggesting that occupation acts as a strong proxy for skill and qualification level. Again, the more interesting differences are in the effect of skills and qualifications within occupations.
When age, gender, first language, hours worked are taken into account:
- There is no additional premium for either skills or qualifications for agricultural workers and labourers
- There is no premium for prose literacy or numeracy for clerks once qualifications are controlled for
- In other occupations, there were greater rewards for higher numeracy skills than for higher literacy skills
- There are only additional premiums for qualifications over skills for administrators and managers, technicians and associate professionals. This reflects qualifications acting as an entry requirement to many occupations.
- Prose literacy is most highly rewarded in sales and service worker and professional occupations. Numeracy is most highly rewarded in professional, technical and associate professional and trade worker occupations.
When skills and qualifications are taken into account:
- Females are likely to earn less than males in most occupations, even after other factors are controlled for
- Hourly wages increased with age across all occupations
- In nearly all occupations, hourly wages are the same for people with and without English as a first language, once English-based literacy or numeracy is controlled for
- Administrative and management occupations is the only occupational group where native English speakers continued to earn more than people with English as an additional language after controlling for English-based literacy or numeracy skill.
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