The PIAAC measure of skills is unique. It measures cognitive skills rather than pre-exisiting years of schooling to understand a country’s human capital – the skills among its population. Using the 2012 PIAAC survey of adult skills, this paper analyses data from 22 OECD countries (including the UK) to make robust conclusions about the value of skills to people’s lifetime earnings.
The authors use numeracy skills as a basis to calculate returns on skills and conclude that earnings returns on good numeracy skills are high in the UK, being around 24% - a larger figure than other countries included in the analysis. Eight countries have returns between 12 and 15%, while only six have returns above 21%.
The analysis is an innovation in measurements of human capital - the value of a population's skills levels to the country and the economy they live in. In the 70s, Jacob Mincer established the practice of measuring human capital by looking at the amount of schooling completed by a person. However schooling is just one of the factors that affects an individual’s skill.
Classically, early career earning is used to calculate returns on skills. The authors argue this is a flawed method as it has a tendency to under-estimate returns on skills. Workers with high lifetime earnings see systematically higher earnings growth - so the point in a career selected to look at wages is important. Individual skills sometimes take time to be revealed while workers find a niche which fits their skill skills set. Current earnings are a good representation of lifetime earnings only when observed in adults between their mid-30s and late-40s.