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and credentialism in the Australian
Alfred Michael Dockery and Paul W Miller
NCVER MONOGRAPH SERIES 10/2012
NCVER Monograph Series
In 2007 the NCVER Board agreed to establish an editorial board to peer-review work commissioned
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Dr Tom Karmel (Chair) Ms Francesca Beddie Professor Gerald Burke Emeritus Professor Anne Edwards Professor Barry McGaw AO Dr Robin Ryan Professor Paul Miller Professor Lorraine Dearden Professor David Finegold Cover design using photography from the ‘A stitch in time’ series by Kristie McGregor This work is from NCVER's collection which features artwork by VET students.
Over-education, undereducation and credentialism in the Australian labour market Alfred Michael Dockery Centre for Labour Market Research and Curtin Business School Curtin University Paul W Miller Curtin Business School Curtin University
NATIONAL VOCATIONAL EDUCATION AND TRAINING
RESEARCH AND EVALUATION PROGRAMNCVER MONOGRAPH SERIES 10/2012 The views and opinions expressed in this document are those of the author/ project team and do not necessarily reflect the views of the Australian Government, state and territory governments or NCVER.
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Acknowledgment This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported in this paper, however, are those of the authors and should not be attributed to either FaHCSIA or the Melbourne Institute.
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TD/TNC 109.07 Published by NCVER, ABN 87 007 967 311 Level 11, 33 King William Street, Adelaide SA 5000 PO Box 8288 Station Arcade, Adelaide SA 5000, Australia P +61 8 8230 8400 F +61 8 8212 3436 E email@example.com W http://www.ncver.edu.au About the research Over-education, under-education and credentialism in the Australian labour market Alfred Michael Dockery, Centre for Labour Market Research and Curtin Business School, Curtin University and Paul W Miller, Curtin Business School, Curtin University We know that, in general, the more years of education individuals acquire, the more money they are likely to earn. Recent responses from Australian governments to the demands for economic growth will see an increase in the proportion of workers holding educational qualifications, particularly higher-level qualifications. There is always a concern that there will not be enough jobs that require the proportionate level of education, and that the increase in those with higher-level qualifications will lead to credentialism rather than to a more skilled workforce.
Using data from the 2006 Census of Population and Housing and the Household, Income and Labour Dynamics in Australia (HILDA) Survey, Dockery and Miller examine the issue of credentialism by comparing the reference or required level of education for occupations and the actual education level held by an individual. They employ the ‘ORU’ model, where O refers to over-education (having more years of education than is required for the job); R refers to the reference or required level of education for a particular job; and U refers to under-education (having fewer years of education relative to the reference level). The credentialism dimension is captured by looking at whether the level of over-education is greater among younger cohorts and the extent to which there is a wage penalty attached to this ‘over-education’.
Key messages Increasing education levels have given rise to a degree of credentialism, with young age cohorts having greater numbers who are over-educated relative to older cohorts.
But the degree of credentialism is quite modest: the (wage) return from years of over-education is 6% compared with 9% for required years of education.
The penalty for credentialism is about the same as that attached to labour market mismatch, whereby, as part of the usual dynamics of the labour market, individuals are in jobs for which they are over-educated.
While the authors find some evidence for credentialism, the results are somewhat reassuring for governments intent on improving education levels. While more members of younger cohorts with specific higher-level qualifications may end up in jobs not commensurate with their qualifications (relative to older cohorts), there is still a healthy return from the implied ‘over-education’.
6 Over-education, under-education and credentialism in the Australian labour market Abstract It is well established that workers with more years of education earn higher wages. By establishing a reference or ‘required’ level of education for a worker’s occupation, it is possible to decompose an individual’s actual level of education into years of required education and years of over-education or under-education relative to that occupational norm. A richer picture of wage determination can be gained by substituting these three terms for actual education in the standard Mincer wage equation.
Relative to the standard estimates of returns from years of actual education, international and Australian studies using this ‘ORU model’ (over-education, required education, under-education) typically find larger returns from years of required education and modest returns from years of overeducation. Workers benefit from being employed in an occupation for which they are under-educated, because the positive effect of being in an occupation with a higher reference level of education outweighs the negative effect of their years of under-education.
This report shows how the ORU model can be used to inform consideration of the wage implications of credentialism, defined as an increase over time in the education standards for specific jobs and which is not necessary for the effective achievement of tasks across positions in the labour market. Data from the 2006 Census of Population and Housing are used to establish the required (mean) level of education in each of 46 two-digit occupations for a sample of employees from waves 1 to 8 of the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Both standard ordinary least squares (OLS) and panel data models show that the estimated return from years of required education exceeds the return from years of surplus education. This result is robust to the augmentation of the ORU model with variables for the occupation of employment, and to estimation on separate samples of males and females. The years of educational attainment attributable to credentialism are associated with an increase in the hourly wage of the same order of magnitude as the years of overeducation in the standard ORU model. Under extreme versions of credentialism, where the level of education is used only to match individuals to jobs and where the skills that are valued in the labour market are only learned on the job, it would be expected that the credentialism wage effect would be zero. The fact that this return is not zero indicates that, even if the higher levels of schooling of our younger cohorts are not needed for them to be assigned to jobs, the skills learned at school are valued in the labour market.
There are two key policy messages from this research. The first is that the additional years of schooling associated with credentialism are not wasted: these additional years appear to be linked to the development of skills that attract a reward of around 3—6%. This is comforting for advocates of the expansion of the education sector. Second, there are large gains that could be potentially achieved through a better matching of workers’ actual educational attainment to job requirements.
NCVER 7 Introduction The relationship between the years of education an individual has accrued and their wage rate is one of the most studied relationships in labour economics. An extensive international body of empirical evidence is highly consistent in finding a positive and sizeable wage premium associated with each additional year of education attained. For Australia, estimation of a standard Mincer earnings equation reveals that each year of education is associated with roughly a 10% higher wage rate, a figure not dissimilar to that found in many other advanced economies. It is important to note, however, that for a number of reasons this cannot be taken to represent the causal effect of education on earnings.
There is also evidence from a growing international literature that individuals receive a lower return from years of education that are in excess of the requirements for the occupation in which they work.
This is typically established by identifying a ‘reference level’ of education for each occupation and decomposing workers’ own years of education into the reference (or ‘required’) level for the occupation they work in, and their shortfall or surplus relative to that reference level. Those with fewer years of education relative to the reference level are termed ‘under-educated’ and those with more years of education than the reference level are termed ‘over-educated’. Then, separate variables for years of over-education (O), years of reference or required education (R) and years of under-education (U) are included in the earnings equation in place of the conventional single years of schooling variable. This is termed the ORU model.
When compared with standard estimates of the return from years of education, this ORU approach typically finds higher returns from reference years of education, quite modest returns from years of surplus education, while, for under-educated workers, the positive effect of being in an occupation with a higher reference level of education outweighs the negative effect of their years of undereducation. The first study to apply the standard ORU approach to Australian data (Voon & Miller 2005) confirmed these findings.
Thus the over-education and under-education approach provides a much richer picture of the returns from years of education in the labour market and has appeal, in that it links demand-side considerations into the typical supply-oriented human capital approach to earnings determination.
From a social policy perspective, this has important implications for the net benefit of additional years of education, once foregone earnings and the direct costs of education are taken into account, and for the importance of efficiently matching the supply and demand sides of the labour market according to job requirements and workers’ skill levels. It also has potentially important implications for recent policy initiatives in Australia, which have sought to increase mandatory levels of schooling and which may be seen as one component of a more general issue of credentialism.
The issue of credentialism has quite broad intellectual roots. It is associated with education being an indicator of social class rather than a means of skill development (Evans & Kelley 2001). In the modern economics literature it is usually linked to education being used as a signalling device (Spence 1973). In this situation, levels of education emerge as indicators, or signals, of innate ability rather than reflecting human capital developed through the education system. Credentialism is often viewed as synonymous with an over-time and unnecessary increase in the education standards required for the effective achievement of jobs. This is the practical implication of credentialism, which is tested below using a framework based on the ORU model.
8 Over-education, under-education and credentialism in the Australian labour market However, there are some important limitations to the over-education and under-education approach.