Education and the wage structure

Education and the wage structurePeter Fredriksson

Præsentationen blev givet på ROCKWOOL Fondens konference Social mobilitet i Danmark: viden, udfordringer og løsninger. Præsentationen og den efterfølgende debat kan ses på ROCKWOOL Fondens youtube kanal på følgende link:https://www.youtube.com/watch?v=LQ-Mbosk6lk

https://www.youtube.com/watch?v=LQ-Mbosk6lk

https://www.youtube.com/watch?v=LQ-Mbosk6lk

2023-05-02 / Peter Fredriksson, Nationalekonomi

• Wage return to a year of schooling is lower in the Nordic countries than in most other countries

(Wage return = the relative wage increase associated with an additional year of schooling)

Fact 1:


Wage return to education

Hanushek et al (2015)

Country avg.


Limits to interpretation

• But cross-country differences in wage/schooling relationships are a bit hard to interpret After all, educational systems are different A year of schooling does not have the same

meaning across countries

• Let’s look at (cross-country) comparable skills instead!

(Data from PIAAC, 35-54 year-olds; pertain to 2011/12)


• Wage return to skills is lower in the Nordic countries than in most other countries

(Wage return = the relative wage increase associated with an additional standard deviation of numeracy skills)

Fact 2:


Wage return to skills


Country avg.

Fact 3: Institutions matter• Wage returns to skills is lower when…

Union density is high Employment protection is stringent And the public sector is large (returns lower in pub.

sector) Private sector Public sector



• At the low-end of the skill distribution, wage returns underestimate the true return to skills

• Why?• Because employment/non-employment

margin responsive to skill• And particularly so in the Nordic countries

Fact 4:

Employment and skills

Note: Relationship b/w non-employment and skills, relative to non-employmentby country. Source: Hanushek et al (2015), and OECD Employment data

Country avg.


• Skill differences manifest themselves as: employment differences rather than wage differencesto a greater extent in the Nordic countries

To summarize…


Skills and labor market outcomes

OECD: Economic Surveys Sweden 2015


• Is lack of incentives a problem in the Nordic labor markets?

• Possibly, but not obviously1. Costs of acquiring education lower in the Nordic

countries than in many other countries the compensating wage differential for acquiring

education should also be lower 2. Also, a simple framework where wage differentials

are explained by demand/supply of skills seem to work well also in the Nordic countries

3. Further, educational investments and the allocation of skills seem to respond to incentives in the Nordic countries

Implications?


• Skill returns and wage dispersion go hand-in-hand

(The return to every productive characteristic is higher in the US than in the Nordic countries)

Fact 5:


Return to skills and wage dispersion



• What about the relationship b/w skills and position in the wage distribution?

• An increase in skills is associated with the same amount of upward mobility DK and US

(In other words: A given move in the wage distribution commands a greater return in the US. As it should be, since costs associated with that move are greater in the US)

Fact 6:


Position in the wage distribution and skills


Country avg.


• When the relative supply of high-skill workers is high (in comp. to demand) their relative wages are low

(Analysis based on IALS – the predecessor of PIAAC)

Fact 7:


Supply of skills and wage differences

NB: Net supply = supply – demand

Rel

ativ

e w

ages

(hig

h vs

low

ski

lled)

Relative net supply (high vs low skilled)

Leuven et al (2004)


• Wage incentives to invest in higher education matter, also in the Nordic countries

Fact 8:


Wage incentives and educational choice

Fredriksson and Topel (2010)

Sweden US


• Skill allocation across jobs is positively related to job-specific reward to skills

(Skills measured using the 8 domains tested in the Swedish military draft)

Fact 9:


Allocation of skills across jobs

Based on Table 2 in Fredriksson/Hensvik/Skans (2016)Uses variation across 8 different skill domains w/in job (some 25000 FE:s)


Conclusions: The wage structure

• Wage differentials are more compressed in the Nordic countries than in the US

• Institutions matter, but wage differentials also driven by market forces (demand/supply)

• When costs of acquiring skills are low, we should also expect wage differentials by skill to be low


Remarks: Educational mobility and wage structure

• Wage differentials and subsidies matter primarily for Number of individuals demanding, say, higher

education But probably minor effects on who demands higher

education• In admitting students to higher education, all

countries screen students on (prior) achievement (GPA, SAT)

• Challenge is to change the underlying relationship b/w school outcomes at the lower levels and family background

Science

Education and the wage structure