Productivity Commission Anthony Shomos Productivity Commission Australian Conference of Economists 29 September 2009 Links between literacy and numeracy and labour market outcomes

Productivity Commission2 Outline of presentation Background and motivation for the project Data used How do literacy and numeracy skills vary across demographic groups? Modelling the effects of skills on:  Labour force participation  Wages Summary and future research

Productivity Commission3 Motivation and background Policy interest in human capital effects on labour market outcomes  Participation & productivity Literature (for Australia) is scarce  Much is known about effect of a person’s education, but not actual skills Uses recent and comprehensive survey data

Productivity Commission4 Adult Literacy and Lifeskills Survey (ALLS) ALLS  2006 data, almost 9000 respondents  Subjective measures and objective tests on skills Links to other surveys  1996 ABS survey for Australia  Part of an international survey (inc. US, NZ, Canada, Italy, Sweden)

Productivity Commission5 Literacy and numeracy data in ALLS Document literacy  locate and use info (maps, tables, job app’s) Prose literacy  understand and use info from text (news, brochures) Numeracy  respond to mathematical demands of situations Problem solving  Goal-directed thinking when no routine procedure Health literacy  Use info related to health issues (drugs, first aid, staying healthy)

Productivity Commission6 Measuring literacy and numeracy Tests for each skill give a ‘score’ (1 to 500) Score converted to a level (1 to 5) Skill level 3 is the: “minimum required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy”

Productivity Commission7 Profile of skills in Australia, 2006

Productivity Commission8 Document literacy improved over last decade Average document literacy skill level

Productivity Commission9 Skills vary by demographic group Education Immigrant status  Country of birth Labour market status  Participation Skills of those in LF > those Not in LF  Wages Skill level 1: $19.70 per hour Skill level 4/5: $32.20 per hour

Productivity Commission10 Literacy declines with age and LF withdrawal

Productivity Commission11 Document literacy skill, by qualification and year

Productivity Commission12 Estimating the effect of skills on labour force participation Logit model (Chiswick, Lee and Miller 2003) LFP = 1 if in labour force, 0 otherwise Ed = education X = other explanatory variables β 1 = direct effect of education on LFP

Productivity Commission13 Variables used in estimation Educational attainment  Degree +: Postgraduate, bachelor  Diploma/certificate: Diploma, Certificate III/IV  Year 12  Year 11 or lower: including Certificate I/II LitNum  1 st principal component for document, prose and numeracy  Representative skill index. Range of 1 to 4/5 used. Other explanatory variables (X)  married, kids, city, country of birth, physical & mental health score, potential work experience

Productivity Commission14 Marginal effects of skills and education on labour force participation

Productivity Commission15 Including skills changes the magnitude of MFX for some variables Sample: Women 25-64Educ only With skills Degree or higher *** *** Diploma/Certificate *** *** Year *** *** Age ** ** Age squared *** *** Age cubed *** *** Child 0­– *** *** Child 5– *** *** COB: Non-English speaking *** ** Physical health *** *** Mental health *** *** *** significant at 1 per cent, ** 5 per cent and * 10 per cent

Productivity Commission16 Estimating the effect of skills on wages 1. OLS regression, for employed persons  Estimated with and without skills 2. Heckman 2 step model, to control for sample selection bias  Results show no statistically significant effect of sample selection bias

Productivity Commission17 Wages model – Marginal effects

Productivity Commission18 Other wage model results Effect of including skills variable  Reduced MFX of education by almost 50 per cent for men (a third for women)  COB (non-English speaking) had a negative effect on wages. But, reduced by 25 to 50 per cent  Negligible change for ‘experience’

Productivity Commission19 Areas for further research Potential modelling issues?  Endogeneity – skills and participation What factors affect skills?  Joint estimation of: wages and skills  Lit/Num ~ F (Ed, Exp, Parents Ed, COB)

Productivity Commission20 Summary and implications Improving skills leads to a large, statistically significant increase in participation and wages  Differences between genders  Education and country of birth effects reduced with skills included in ‘traditional’ HC models  But results do not control for innate ability Policy implications  Improving skills, not just education, important for participation and productivity  Identify factors which affect skills

Productivity Commission21 ?

Productivity Commission22 Skills increase with years of education

Productivity Commission23 Document literacy varies according to occupation