IFS Working Papers, Institute for Fiscal Studies (IFS) 04/08
This paper uses the measures of basic skills (or functional literacy) in the International Adult Literacy Survey to examine the impact of education and basic skills on earnings across a large number of countries. We show that the estimated return to formal education is sensitive to the inclusion of these measures: excluding them biases the return to education upwards in many countries to a significant degree, usually 1 or 2 percentage points. In almost all countries, the test scores have a well-determined effect on earnings although there is considerable variation in the size of the effect. The highest returns to skills tend to be in English speaking countries. Comparing results across countries, the returns to education and the returns to basic skills are not correlated. The evidence suggests that there is considerable benefit in many countries for policy intervention to increase the skill levels of workers. This should not just be directed at dealing with low-skilled individuals – there are gains across the skills distribution.