Skill and education effects on earnings in 18 Countries: The role of national educational institutions
Introduction
It is undisputed that educational attainment has a profound influence on individual labor market prospects. The higher educated earn more, have higher occupational ranks, have better employment contracts, and have a higher probability to be employed than persons with lower levels of qualification. It is also evident that there are several different mechanisms at play that explain this effect (Hannan et al., 1990, Rosenbaum et al., 1990). A well-known distinction is between human capital theory and credentialism theory (Bills, 2003, Brown, 1995, Hage et al., 1988; Weiss, 1995). Human capital theory and its sociological (functionalist) allies see education as producing skills that are rewarded by employers (Becker, 1993, Bell, 1974, Parsons and Shils, 1951, Davis and Moore, 1945). Credentialism theory, by contrast, assumes that education is used for selection into organizations for reasons other than the productivity that is associated to it (Bills, 1988). Although various perspectives exist on credentialism, one central element of the theory holds that education is used as a means for social closure. By institutionalization processes regarding the educational structure and access to occupations, elites are able to limit the supply of workers, and to restrict access to persons from preferred social backgrounds (Brown, 1995, Bills, 2005, Collins, 1979, Meyer, 1977). Credentialism processes typically involve inequalities that are not resulting from differences in productivity between workers.
Comparative research has argued that the strength of the impact of education is dependent on the educational institutional context (Allmendinger, 1989, Müller and Gangl, 2003, Harmon et al., 2001). In educational systems that are vocationally specific and are more strongly tracked, stronger effects of education are found on labor market outcomes (Shavit and Müller, 1998, Stiglitz, 1975, Van der Velden and Wolbers, 2003, Wolbers, 2007). Yet, comparative research has ignored the possibility that countries do not only differ with regard to the strength of the effect of schooling, but also with regard to the mechanism why education affects labor market outcomes. Comparative research has explained variation in the education effect usually by a mixture of arguments relating to the skills obtained in education and the credentials by which people can get access to well-paying jobs – two theories that are clearly different in their perception of why education matters.
This ignorance of potential differences across countries in the usefulness of theoretical explanations is unfortunate for two reasons. First, given that the strength of the effect of education seems to vary across countries, more insight into the mechanisms on why education affects labor market outcomes is needed to understand this cross-national variation. We need to open up a black box why in one country the effect of education is stronger than in the other. Such explanations are not satisfactory if we stick to the aggregate level by referring to educational institutions, as is thus far the case. We need to integrate institutional perspectives with theories on individual behavior. Second, given that a good explanation of a phenomenon indicates under which conditions the explanation holds true (Popper, 1972), we further develop existing theories by formulating institutional conditions under which these theories are more likely to be supported.
In this paper I study the impact of educational qualifications and measured skill on earnings in 18 countries. Looking at partial effects of skill and education separately, we are able to analyze in which institutional context measured skill provides more additional gains in terms of earnings, and in which institutional context education itself is sufficiently informative about the productivity of workers.
To this aim, I contextualize the importance of education and measured skill by relating their effects to two educational institutional characteristics: external differentiation and vocational orientation. External differentiation refers to the extent to which students are sorted in separate ability-grouped schools, at which ages this occurs, and how many different school types are offered. The creation of a diversified set of school types has a long history in externally differentiated systems. It took shape at the end of the 19th and early 20th century, when post-primary vocational schools were developed in response to changing demands in the economy. Such schools came into existence alongside the already prevalent classical academic types of education. Based on the credentialization theory’s arguments that educational systems have been created in order to legitimize and emphasize social differences, such credentalization can be considered most developed in systems where the structure and individual placements are known to everyone involved, and where systems structurate selection in separate school types for multiple years. This is much less evident in internally differentiating countries such as the United States.
In systems with strong educational differentiation it is likely that education functions as a credential that is (partly) unrelated to productive capacities/skills of the holders of qualifications. This would imply that reward of skills measured independently from education becomes more relevant in strongly differentiated systems, given that the market forces employers in a strongly credentialized society still to reward productivity of workers. The vocational orientation refers to the extent to which work-relevant skills are obtained in schooling. In systems that incorporate a strong vocational training component, it is likely that employers use education as an indicator of productivity-enhancing skills more than in systems with a weak vocational component.
Section snippets
The education effect in comparative research: from strengths to mechanisms
Existing comparative research on the effect of education on the labor market has focused predominantly on its strength. The seminal volume by Shavit and Müller (1998) on the from-school-to-work transition shows that the strength of the education effect depends on the differentiation and vocational orientation of the schooling system (cf. Allmendinger, 1989, Müller and Gangl, 2003). When these aspects of educational systems are more strongly developed, employers are better informed about
Hypotheses
Cross-national variation in the applicability of human capital and credentialism theories is tested by examining the partial effect of productivity-enhancing skills on earnings, controlled for educational attainment.
To recall, in strongly vocationally oriented educational systems, such as in Germany, the Netherlands, and Switzerland, the human capital model of education is expected to be more appropriate than in weakly vocationally oriented systems, such as, in our study, in the United States,
Empirical design
The International Adult Literacy Survey (IALS) of 1994/1998 is the best available dataset to test our hypotheses. IALS has been developed to measure skills relevant for work among adult populations aged 16–65 in 19 countries, of which 18 have all the relevant information for our purposes. Furthermore, achieved educational level and type is recorded. Educational attainment is operationalized using six categories: primary education, lower secondary vocational, lower secondary general, upper
Empirical results
Estimates of several random intercept multilevel interval regression models are displayed in Table 2. All models include two error terms, one at the level of countries, and one at the level of individuals within countries, and further include fixed effects of individual and country-level variables. Inspection of the estimates of all models is preferred, rather than just the fit statistics. The two country-level variables are rather strongly correlated, and we need to see whether different model
Conclusions and discussion
In this paper I examined the effects of education and measured skills on earnings in 18 countries. The study was particularly interested in the question whether the partial effect of skill is dependent on the vocational orientation and the degree of external differentiation of the schooling system. Based on human capital theory it can be assumed that education produces those skills that employers are willing to reward. In educational systems that produce work-relevant skills in the vocational
Acknowledgments
This research has been supported by a personal VIDI grant of the Netherlands’ Organization for Scientific Research (NWO), grant number 452.07.002. Earlier versions of this paper have been presented at the Sociology Seminars at Nuffield College, University of Oxford, University of Tilburg, and at the 2009 summer meeting of ISA-Research Committee 28 on Social Stratification and Mobility, Yale University.
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2020, Research in Social Stratification and MobilityCitation Excerpt :We aim at extending this strand of research by arguing that income inequalities in the early careers of people holding VET diplomas are partly due to institutionalized differences in training characteristics, which affect the VET diplomas’ signalling value as well as the average skill level of the diploma holders. This argument draws on comparative research on education systems that implies that the institutional characteristics of education systems, such as the levels of standardization, differentiation, and vocational specificity, impact individual skill formation and productivity and thereby affect labour market outcomes (Breen, 2005; Müller & Shavit, 1998; van de Werfhorst, 2011; Wolbers, 2007). These findings suggest that highly standardized and vocationally oriented education systems with a high degree of differentiation give young workers a favourable start in the labour market, and that general education increases in importance over the career (de Lange, Gesthuizen, & Wolbers, 2014; Hanushek, Schwerdt, Wössmann, & Zhang, 2017; Wolbers, 2007).