Monday, December 22, 2014

Skills and wage inequality across labour markets

by Dirk Van Damme
Head of the Innovation and Measuring Progress division, Directorate for Education and Skills

Mean monthly earnings in USD (using Purchasing Power Parities) of individuals, by literacy proficiency level, gender, age and educational attainment (2012)

In a completely open labour market, earnings from employment would compensate individuals for their contribution to the organisation’s economic success. The price put on one’s labour also depends on the abundance or scarcity of the individual’s specific set of skills in the market. But economic price-setting mechanisms do not operate in a vacuum, and are heavily influenced by political and institutional factors that, in themselves, are often the outcome of long histories of social conflict and compromise.

Governments tend to regulate minimum wages and other framework conditions, while sectoral collective labour agreements set rules for salary increases by seniority or educational qualifications. Such arrangements serve to set minimum wages and living standards for vulnerable workers. In fact, some of the rationales underlying wage differentials across the labour market are increasingly scrutinised for their harmful social impact. For example, several countries are debating the social and economic impact of regulations favouring older workers simply because of their age.

It has now been well established that wage inequality has increased. Increasing social inequality also seems to have an adverse impact on growth. Even if inequality and well-being should be seen as multi-dimensional, incorporating many more factors than just wages, the income generated from employment lies at the core of social inequality. The latest Education Indicators in Focus, presenting data from the Survey of Adult Skills (a product of the OECD Programme for the International Assessment of Adult Competencies, or PIAAC), presents a snapshot of how different factors, such as gender, age, educational attainment and, especially, skills, affected the distribution of wages in 2012. The snapshot doesn’t provide trend data, but shows where we are now.

As the chart above illustrates, on average across the 24 countries and regions that participated in the survey, the wage differences between various categories are significant. Gender, age and educational attainment all have an impact on wages. Labour markets and wage-setting systems tend to closely reflect educational qualifications, often through institutional frameworks. Wages also reward professional experience and seniority of older workers. And the gender bias in wages partly echoes different labour market participation patterns between males and females.

But the most interesting finding of the chart is the very significant impact that skills have on earnings within each category of the gender, age and education variables. Skills differentiate wages to an almost similar degree within both sexes. With age we see a different pattern: as people grow older, their wages depend more and more on their skills level. But the wage differentiation only happens at the top of the skills distribution: higher skilled older workers earn higher wages than younger colleagues, while lower skilled workers don’t see their wages increase with age.

The interaction between educational qualifications and skills in setting wages again, is of a different nature. Labour market arrangements are still heavily based on educational qualifications. But educational qualifications do not always accurately describe the qualification-holder’s level of skills. Wages vary widely, even within each qualification level, by the actual skills people have; this is especially evident among tertiary-educated workers. If an individual is not equipped with a set of skills commensurate with his or her qualification, then the qualification in itself does not seem to secure a high wage. Better-skilled individuals with a mid-level qualification earn more than low-skilled tertiary graduates. At the same time, tertiary educated workers with low skills still get a higher wage than mid-skilled workers with lower qualifications.

Several countries are in the process of reforming their labour market arrangements. In general, such reforms aim to open up labour markets with more flexible arrangements, while at the same time protecting vulnerable workers and containing the overall level of wage inequality. In this context, the question whether skills and experience should have a higher impact on wages than seniority, gender or educational qualifications is becoming a critically important policy issue.

Education Indicators in Focus, issue No. 27 by Eric Charbonnier and Simon Normandeau
Education Indicators in Focus, issue No. 27, French version
OECD Skills Outlook 2013
On this topic, visit:
Education Indicators in Focus: 
On the OECD’s education indicators, visit:
Education at a Glance 2013: OECD Indicators:
Chart source: © OECD

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