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The contribution of literacy to economic growth and individuals’ earnings
In today’s technologically-based global economy, considerable emphasis is placed on the contribution made by people, or what economists refer to as human capital, to economic growth. The theory is that the relative contribution of individuals to growth depends on their human capital – the knowledge, skills, competencies and other attributes that are relevant to economic activity. As a consequence, developing the skills and knowledge of the labour force is regarded as a key strategy for promoting national economic growth. Related to this is the assumption that individuals who contribute more by way of their human capital should earn more. Distributional issues are a consideration as well, since increasing access to education and training can help to address inequality in employment and earnings outcomes for more- and less-skilled individuals.
Because we have lacked direct measures for ‘skills,’ indicators of educational attainment have typically been used as a proxy measure, with educational attainment being measured either as years of schooling or as highest level of education completed, ranging from less than high school to having one or more university degrees. However, these indirect indicators cannot distinguish between the acquisition of specific knowledge versus general literacy skills.The development of new surveys that allow ‘skill’ to be measured more directly have permitted researchers to tackle these issues. One such survey is the International Adult Literacy Survey (IALS) which provides measures of directly-assessed literacy skills for the population aged 16 to 65 years for twenty-three OECD countries. 1 That study found that investment in human capital, that is, in education and skills training, is three times as important to economic growth over the long run as investment in physical capital, such as machinery and equipment. The results also show that direct measures of human capital based on literacy scores perform better than years-of-schooling indicators when explaining growth in output per capita and per worker.
One of the study’s key conclusions is that human capital accumulation matters a great deal for the long-run wellbeing of nations. In fact, the study suggests that differences in average skill levels among OECD countries explain fully 55% of the differences in economic growth over the 1960 to 1994 period. This implies that investments in raising the average level of skills could yield large economic returns.Furthermore, the study finds that the average literacy score in a given population is a better indicator of growth than one based solely on the percentage of the population with very high literacy scores. In other words, a country that focuses on promoting strong literacy skills widely throughout its population will be more successful in fostering growth and wellbeing than one in which the gap between high-skill and low-skill groups is large. 2
The purpose of the analysis was to measure the extent to which a number of factors contribute to annual earnings levels. Education is measured in two ways, one being based on years of schooling and the other, based on highest level of schooling completed. Another factor considered was years of work experience, measured as age minus years of education minus six (the latter is assumed to be the age at which formal education begins).
Green and Riddell found that the impact of education on earnings arose from two separate effects. The first was an increase in earnings associated with the development of specific knowledge and skills through rising levels of education. The second was an increase in earnings resulting from the stronger literacy skills that are also associated with higher levels of education. The results were similar when education was measured by level of educational attainment or by years of schooling.
The authors found that each additional year of education raises earnings by approximately 8%. This estimate of the ‘return to education’ is similar to that obtained by other studies. Labour market experience had a large effect as well, boosting earnings approximately 4.5% a year early in the career and by progressively smaller amounts with accumulated experience. Finally, the average literacy score had a large positive effect, separate from the effect of educational attainment, labour market experience and other factors. The analysis found that an increase in an individual’s position on the distribution of literacy scores of 10 percentiles resulted in a 3% increase in earnings.
Figure 1: Annual earnings by literacy levelSource: Literacy, Numeracy and Labour Market Outcomes in Canada. Statistics Canada Catalogue number 89-552-MIE2001008.
According to the authors, these results suggest that a substantial amount of the overall impact of education on skills is through its effect on literacy. This is especially the case when looking at earnings of individuals whose highest level of education is high school graduation compared to those with just elementary school.
Without taking literacy scores into consideration, high school graduates earned approximately 50% more than those with an elementary education, while university graduates earned over 100% more. In the case of high school graduates, over 60% of the positive impact of high school graduation on earnings was due to the increase in literacy skills associated with the completion of high school. For postsecondary non-university graduates and for university graduates, slightly less than half of the earnings premium associated higher education was accounted for by increased literacy skills.
While the link between education and the knowledge and skill that an individual contributes to the labour market and to society more generally is a strong one, more recent studies have endeavoured to refine our understanding of how education contributes to economic growth. Much effort is being put into the development of new surveys, like the IALS, that measure specific skills directly. Use of these direct measures in analyses of economic growth find that, indeed, a major contributor to growth consists of the literacy skills of a country’s population, broadly defined to include prose, document and quantitative literacy.
It follows, then, that wage returns to literacy tend to be highest in countries, such as Canada and the United States, where the demand for literacy skills is high and where literacy levels are highly variable. In other words, when literacy skills are in high demand, individuals who possess strong literacy skills are more successful in the labour market than individuals whose literacy skills are weaker. Recent analysis finds, in fact, that differences in literacy and numeracy skills explain one-third of the variation in wages in Canada. In addition, further gains in earnings are associated with other skills and knowledge acquired through education.
In May 2005, the first report from the new Adult Literacy and Life Skills Survey (ALL) will compare literacy profiles across six countries. That report will explore the relationship between literacy skills in different countries and indicators relating to labour force outcomes, education and social outcomes. The Canadian report will be published in September 2005. It will provide literacy profiles at the provincial level and for selected sub-populations, including the Aboriginal population, immigrants, youth and seniors. That report will also explore the determinants of literacy skills in Canada.