Literacy, Numeracy and Labour Market Success

Introduction

One of the strongest empirical regularities in the Australian labour market is the positive association between educational attainment and labour market success. In analyses that examine the average income return to years of education, each additional year of education is associated with around eight per cent additional income. More detailed accounts of the labour market performance of the better educated have examined the income returns to different types of education. It has been reported that individuals who possess a degree have incomes around 50 per cent higher than those whose highest educational attainment is the completion of high school, while the income advantages of individuals who hold either a diploma or a certificate are 40 per cent and 10 per cent, respectively (see Preston (1997)). Similarly, when the determinants of unemployment rates are considered, the better educated are shown to have lower unemployment rates than early school leavers. The advantages of the tertiary educated in this regard are considerable (see Le and Miller (2000)).

Why are the better educated more successful in the labour market than the less-well educated?

This question has been discussed in the screening versus human capital debate (see, for example, Andrew Weiss (1995)). This debate, however, has not yielded much in the way of concrete evidence on the issue. In the Australian context, the matter has been examined by Miller and Volker (1984) and by McNabb and Richardson (1989). Miller and Volker (1984) compare the salaries of university graduates employed in areas where they might be expected to utilise skills acquired at university with salaries of graduates of equivalent background not so employed. Their argument is that if employers place little premium on skills acquired and use the awarding of a degree as a screen, there will be no difference between the salaries of these two groups. Comparisons made for economics and science graduates implied that for the most part the university education was providing a screening function.¹

McNabb and Richardson (1989) examine the relevance of the screening hypothesis by comparing the earnings determination process for a number of groups, including wage and salary earners (where screening may be useful) and the self-employed (where it is assumed there is no immediate role for screening)² , and in occupations categorised as screened or unscreened on the basis of initial earnings and educational attainment.³ McNabb and Richardson’s (1989) results from the latter analysis provided some support for the screening hypothesis, but their results from the former analysis do not. The test based on a categorisation of occupations as screened and unscreened is, however, generally regarded as a weak test, as it is based on a comparison of outcomes in occupations where screening is likely to be most and least powerful. It is therefore fair to conclude that the Australian research has not yielded much knowledge on the reasons why the better educated in the Australian labour market have labour market outcomes that are superior to those of their less-well educated counterparts.

One direction for research that might be fruitful is to examine the links between education, labour market outcomes and the specific skills that might be acquired in the education process (see Weiss (1995)). This approach has been taken by Altonji (1995) and Kang and Bishop (1986). These studies have examined the links between the number of courses undertaken per year of study and labour market outcomes, and the links between grades and labour market outcomes. The results attribute less than one-quarter of the total effect of schooling to the skills learned in school. However, the indices of skills learned given by courses undertaken, academic grades or test scores for basic skills of mathematics, reading and vocabulary (such as those used by Kang and Bishop (1986)) may be crude measures of the skills that are important in the labour market.

The aim of the current paper is to examine the relationship between labour market success and educational attainment within a framework that allows for the links among educational attainment, literacy and numeracy and various labour market outcomes (labour force participation, unemployment, incomes). The analyses undertaken will be based on the Survey of Aspects of Literacy that was conducted by the Australian Bureau of Statistics in 1996. This survey contains a range of data on numeracy and literacy skills unsurpassed in Australian data sets. These data relate to ‘functional literacy and numeracy skills’ and so may be better suited to examination of labour market outcomes than more standard academic test results. It also contains a range of information on demographic and workforce characteristics.

The specific questions that will be addressed using the Survey of Aspects of Literacy are: What are the gross increments in labour market outcomes (labour force participation, unemployment rates, incomes) associated with various levels of qualifications (degree, diplomas, certificates etc.)? What are the typical increments in labour market outcomes associated with literacy and numeracy? Are some literacy skills (for example, prose literacy, document literacy and quantitative literacy) more valuable than others? How strong are the links between the highest educational attainment and levels of literacy and numeracy? To what extent do the (presumed) high levels of literacy and numeracy of the better educated account for their superior labour market outcomes in the Australian labour market?

The structure of this paper is as follows. Section 2 presents an overview of the Survey of Aspects of Literacy. Studies that have used these or related data are reviewed in Section 3. Section 4 introduces a number of issues that need to be addressed when analysing labour market outcomes using the Survey of Aspects of Literacy. It presents a number of cross-tabulations of data on educational attainment, literacy, numeracy and labour market outcomes. Multivariate analyses of the determinants of labour market outcomes that seek to ascertain the separate contributions of educational attainment and literacy and numeracy skills to labour market success and failure are presented in Section 5. Section 6 contains a summary and conclusion.

Lang and Kropp (1986) argue that the test implemented by Miller and Volker (1984) is more a test of whether the skills accumulated in a degree are general or specific.
This test is due to Wolpin (1977).
This test is due to Riley (1979).

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