Human capital or signaling? Differences in skills distributions and the labor market disadvantage of less-educated adults across 21 countries

Abstract

Less-educated adults bear the highest risk of labor market marginalization in all advanced economies, but the extent of their disadvantage differs considerably across countries.Exploiting unique data on the actual skills of adults from PIAAC 2011/12, we examine two prominent explanations for this cross-country variation. Human capital theory suggests that the marginalization of less-educated individuals reflects a lack of skills. The signaling explanation emphasizes the role of educational credentials as easy-to-observe proxies for skills and productivity. It suggests that the skills distribution of educational groups can affect their labor market position beyond any individual-level effect of skills by influencing the signaling value or "skills transparency" of educational credentials. Applying a two-step regression approach to a sample of 48,033 adults in 21 countries, we find support for both explanations. Consistent with human capital theory, literacy and numeracy skills are positively related to occupational status at the individual level and partly account for crossnational differences in the labor market disadvantage of less-educated adults. Yet, crosscountry variation remains considerable even after controlling for skills and further key observables. Consistent with the signaling account, country-level regressions show that the remaining variation is related to two direct measures of skills transparency: the aggregate skills differential between less-and intermediate-educated adults and the internal homogeneity of these groups. We also find that the labor market disadvantage of lesseducated adults increases with the vocational orientation of secondary education, presumably reflecting individual-and aggregate-level effects of occupation-specific skills, which were not assessed in PIAAC.2

Measuring the signaling value of educational degrees: secondary education systems and the internal homogeneity of educational groups

“…I first construct a country-level index of the internal homogeneity of educational groups and then test my hypotheses by regressing it on indicators of education system characteristics. The last part of the empirical section reproduces key findings from a related study (Heisig et al 2016) to show that cross-national variation in the skills gap and in the extent of internal homogeneity help to account for variation in the labor market disadvantage of less-educated adults, even after controlling for cognitive skills at the individual level. The final section draws conclusions and discusses some limitations as well as directions for future research.…”

“…As discussed in the initial sections of the paper, these cross-national differences in internal homogeneity (and skills gaps) might help to account for country variation in the labor market attainment of different educational groups. This possibility is investigated in a closely related study by Heisig et al (2016) that focuses on differences in occupational status between less-and intermediate-educated adults. Heisig et al (2016) use a broader age restriction than the main analysis in the present paper, including all respondents between ages 16 and 54 in their analysis (as in the present study, respondents are excluded if they are enrolled in fulltime education or obtained their highest degree in a foreign country).…”

“…This possibility is investigated in a closely related study by Heisig et al (2016) that focuses on differences in occupational status between less-and intermediate-educated adults. Heisig et al (2016) use a broader age restriction than the main analysis in the present paper, including all respondents between ages 16 and 54 in their analysis (as in the present study, respondents are excluded if they are enrolled in fulltime education or obtained their highest degree in a foreign country). Occupational status is measured using the International Socio-Economic Index of Occupational Status (Ganzeboom et al 1992), a standard measure of labor market attainment in the (comparative) sociological literature.…”

“…In addition, they also control for sex, potential work experience, foreign-birth/foreign-language status, parental education, and self-employment status as additional predictors. For further details, see Heisig et al (2016).…”

“…Effect sizes for the two direct measures of skill transparency are substantial, being larger than for vocational orientation, a well-established predictor of labor market inequalities by educational attainment. Formal country-level regressions reported in Heisig et al (2016) Heisig et al (2016). Panel I shows the bivariate relationships of the gap in occupational status ('ISEI gap') between less-educated and intermediate-educated adults with two direct measures of skill transparencythe skills gap and the index of internal homogeneity-as well as vocational orientation.…”