Returns to Education and Skills in the Labor Market: Evidence from Japan and Korea

• DOI: http://doi.org/10.1111/aepr.12169
• Author: Dainn Wie,Jong‐Wha Lee
• Date: 01 January 2017
• Published date: 01 January 2017

Returns to Education and Skills in the Labor

Market: Evidence from Japan and Korea

Jong-Wha LEE

1

†and Dainn WIE

2

1

Korea University,

2

National GraduateInstitute for Policy Studies

This studyinvestigates the determinants of skillproficiency, and the impactof adult skills on earnings,

in Japan and Korea. Using the Program for the International Assessment of Adult Competencies

surveydata, it shows that Japaneseadults perform betterthan Korean respondents,on average, on skill

proficiency tests. A decomposition analysis shows that the score gap in literacy, numeracy, and

problem solving skills between the two countries is mostly due to different returns to individual

characteristics such as upper-secondary and tertiary education. Adult skills have a positive and

significant impact on individual earnings and employment probability, in both countries. In Japan,

the returns to literacy, numeracy, and problem-solving skills increase significantly with experience,

and tend to fall withformal education, suggestingemployer learning or human capital accumulation

through career progression. In contrast, in Korea, the returns to literacy and numeracy skills do not

seem to increase withexperience.

Key words: adult skills, education, employer learning, Japan,Korea, wage

JEL codes: I26, J24, J31

1. Introduction

In the past 50years, well-trained human capital has been essential for economic

development in East Asia. Significant workforce improvements helped East Asian

economies raise their per capita income and living standards. The abundance of educated

and high-skilled human resources is a key factor in the success of the export-oriented

development strategies of these economies, helping them maintain their comparative

advantages in global markets.

Let us consider Japan and South Korea (Korea, hereafter). The strong improvement

of their workers’educational attainment has been a key factor in their successful

industrialization and economic growth over the past five decades. Both countries show

strong student performance in internationally comparable tests: fifteen-year-old students

in Japan and Korea have been among the best performers in mathematics, science, and

reading tests in the Programme for International Student Assessment (PISA), since

2000.

The authorsare grateful to Daiji Kawaguchi,Seik Kim, and Marcus Nolandfor helpful comments and

EunbiSong for research assistance.This work was supported by a KoreaUniversity Grant (K1508441).

†Correspondence: Jong-Wha Lee, Department of Economics, Korea University, 145 Anam-ro,

Seongbuk-gu, Seoul 02841, Korea.Email: jongwha@korea.ac.kr

doi: 10.1111/aepr.12169 Asian EconomicPolicy Review (2017) 12, 139–160

©2017 JapanCenter for EconomicResearch 139

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However, students’test scores are nota straightforward measure of the quality of labor

force. Neithereducational attainment nor testscores reflect the skills and experience gained

by individuals,after they graduate from school.Several surveys attempt to assess thequality

of labor force across countries, adopting different adult skills measures. Notable examples

are the International Adult LiteracySurvey (IALS), the Adult Literacyand Life Skills Survey

(ALLS), and the Programme for the International Assessment of Adult Competencies

(PIAAC).

Since 2008, the OECD(2013) has developed the PIAAC,involving 33 countries, in two

rounds of surveys. The PIAAC assessed the proficiency of adults aged 16 to 65 in literacy,

numeracy, and problem solving in technology-rich environments (problem solving,

hereafter)—similar to those assessed in PISA; but the two studies focus on different

assessment tasks, reflecting the different environments in which 15-year-old students and

older adults live.

1

According to the PIAACtest, Japan obtained the highest averagetest scores in all three

domains: numeracy (288 points), literacy (296 points), and problem solving (294 points),

followed by Finland (OECD, 2013). In contrast, Korea did not perform well in the

international skill tests, ranking only 17

th

in numeracy (263 points), 14

th

in literacy (273

points), and 10

th

in problem solving (283 points).

The Korean case stands out as an example of a significant discrepancy between

students’academic achievements and adult skills test scores: Korean adults did not

perform as well as students in internationally comparable assessments. By contrast, both

Japanese students and adults were among the best performers. As shown by literacy

scores in Table 1, Korean students scored higher in the PISA, while adults in the

corresponding age groups scored lower in the PIAAC. Such differences may reflect

disparities in the quality of post-secondary education and on-the-job training, suggesting

that Japanese students can develop additional skills at higher levels of education, or at

work, while Korean students cannot.

The data on the distribution of skills proficiencyby age suggest that younger adultstend

to show higher skill proficiencies than their older peers in all domains (OECD, 2013).

However, the age-skill profiles are different in Korea and Japan. Figure 1 presents the

age-skill profiles in Japan, Korea, and all OECD participating countries, when skills are

measured by literacy. The age-skill profiles follow an inverted U-shape in all countries.

Japanese adultsshow higher levels of skill proficiencyin all age groups. Literacy proficiency

in Japan reaches a peak, on average, at age 35 and declines steadily thereafter. By contrast,

literacy proficiency in Korea peaks, on average, around age 20, and then declines much

faster in older age cohorts. The literacy gap between Japan and Korea gradually increases

with age. The Korean age-skill profile shows the largest difference between younger and

older adults, on both the literacy and numeracy scale.

This study investigates empirically the determinants of skill proficiency and the

impact of skills on earnings and employment probability, using data for Japanese and

Korean workers, collected through the PIAAC. In addition, this study investigates the

factors behind the differences in skill test scores between the two countries. It compares

the impact of skills on wages and employment in the Japanese and Korean labor markets.

Returns to Educationand Skills Jong-Wha Leeand Dainn Wie

140 ©2017Japan Center for EconomicResearch