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Productivity Commission Staff Working Paper - Literacy and Numeracy Skills and Labour Market Outcomes in Australia - 2014 Anthony Shomos - Matthew Forbes The views expressed in this paper are those of the staff involved and do not necessarily reflect the views of the Productivity Commission. May 2014 Commonwealth of Australia 2014 ISBN 978-1-74037-487-3 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from the Productivity Commission. Requests and inquiries concerning reproduction and rights should be addressed to Media and Publications (see below).This publication is available from the Productivity Commission website at www.pc.gov.au. If you require part or all of this publication in a different format, please contact Media and Publications. Publications enquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: maps@pc.gov.au General enquiries: Tel: (03) 9653 2100 or (02) 6240 3200 An appropriate citation for this paper is: Shomos, A. and Forbes, M. 2014 Literacy and Numeracy Skills and Labour Market Outcomes in Australia, Productivity Commission Staff Working Paper, Canberra.The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au) or by contacting Media and Publications on (03) 9653 2244 or email: maps@pc.gov.au CONTENTS iiiContents Acknowledgments iv Abbreviations v Key Points vi 1 Introduction 1 1.1 Human capital, literacy and numeracy —why the policy interest? 2 1.2 Framework linking human capital and labour market outcomes 4 1.3 Previous research 9 1.4 Outline for the rest of the paper 10 2 A profile of literacy and numeracy skills in Australia 13 2.1 How are literacy and numeracy skills defined and measured? 13 2.2 A profile of literacy and numeracy skills in Australia 14 2.3 Literacy and numeracy skills by labour market outcomes 26 3 Modelling and results 31 3.1 Model and variables 31 3.2 Results 36 3.3 Conclusion 44 A Literacy, numeracy and problem solving measures in PIAAC 47 A.1 Proficiency measures in PIAAC 48 A.2 Measuring latent proficiencies 54 A.3 Multiple imputation and plausible values 59 B Descriptive statistics 63 B.1 Construction of variables used in the modelling 63 B.2 Descriptive statistics 65 C Estimation results 67 C.1 Labour force status models 67 C.2 Wages models 70 References 73 iv ACKNOWLEDGMENTSAcknowledgments There were a number of Productivity Commission staff that provided valuable input to this staff working paper. The authors would particularly like to thank Lou Will and Patrick Jomini for their guidance and feedback on drafts. Jared Greenville, Jenny Gordon, Lisa Gropp, Mike Woods and former Commission staff member Noel Gaston also provided helpful comments. The authors also wish to thank the external referees Chris Ryan (Melbourne Institute of Applied Economic and Social Research, University of Melbourne) and Garry Barrett (University of Sydney) for their helpful feedback. Other helpful input was also provided by Bruce Caldwell and Myles Burleigh at the Australian Bureau of Statistics (ABS). The paper used data from an ABS confidentialised unit record file from the Programme for International Assessment of Adult Competencies survey. The findings and views reported in this paper are those of the authors and do not necessarily reflect the views of the Productivity Commission or of the external organisations and people who provided assistance. ABBREVIATIONS vAbbreviations ABS Australian Bureau of Statistics ALLS Adult Literacy and Lifeskills Survey ESB English Speaking Background IALS International Adult Literacy Survey IRF Item Response Function IRT Item Response Theory LFS Labour Force Status ME Marginal effect NAPLAN National Assessment Program –– Literacy and Numeracy NESB Non-English Speaking Background OECD Organisation for Economic Co-operation and Development PIAAC Programme for the International Assessment of Adult Competencies PISA Programme for International Student Assessment PSU Primary Sampling Units SAL Survey of Aspects of Literacy
INTRODUCTION 1 1 IntroductionLiteracy and numeracy skills form part of a person’s ‘human capital’, and are important for economic and social participation. Research for Australia has found that having better literacy and numeracy skills increases the likelihood of positive labour market outcomes (for example, Chesters, Ryan and Sinning 2013; Barrett 2012). This paper profiles the literacy and numeracy skills of Australia’s adult population and assesses how important they are for two labour market outcomes –– employment and wages. Results confirm findings from previous research. Specifically, they show that: • many people have relatively low literacy and numeracy skills and the types of literacy and numeracy tasks they can do are limited in comparison with people who have higher skills. For example:– 14 per cent of Australians aged 15–74 (2.4 million people) have low literacy (level 1 or below) meaning they can, at best, read only relatively short texts from which they can locate only a single piece of information (detailed descriptions of tasks for each skill level are in table A.1). – 16 per cent of the population have high literacy (level 4/5), meaning they can make complex inferences and evaluate subtle truth claims or arguments in lengthy or multiple texts. • there is a high correlation between a person’s literacy and numeracy skills• literacy and numeracy skills vary across different groups. On average:– people with a non-English speaking background have lower (English) literacy and numeracy skills than other people – older persons (55–74) have lower literacy and numeracy than younger persons – more highly educated people have higher literacy and numeracy • there is a strong positive association between literacy and numeracy skills and labour market outcomes.
Section 1.1 of this chapter describes the recent policy focus on human capital and on improving literacy and numeracy. Section 1.2 develops a framework for 2 LITERACY AND NUMERACY SKILLS IN AUSTRALIAunderstanding how literacy and numeracy skills are developed and the relationship between those skills and labour market outcomes. Section 1.3 summarises findings from previous research that has examined the association between human capital (including literacy and numeracy) and labour market outcomes, and outlines the rest of the paper. 1.1 Human capital, literacy and numeracy –– why the policy interest? Human capital can be defined as ‘the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being’ (OECD 2001, p. 18). People with more human capital tend to enjoy better health, improved life satisfaction and higher levels of social engagement (McLachlan, Gilfillan and Gordon, 2013). People with more human capital are also more productive. Investment in education and training 1 increases a person’s productivity and his or her gross returns2 from working, as measured by wages (Becker 1993). As people acquire more human capital, they are more likely to enter the workforce and earn more, all else equal.1 This investment can be made by the person, an employer or the government. 2 Net returns from education and training are less than gross returns, as they take account of the cost of training and any lower earnings during the investment period. Literacy and numeracy skills are becoming increasingly important for productivity, as they provide the foundation to develop other skills: The basic skills acquired in early childhood and school years, particularly literacy and numeracy, are the necessary foundation for developing higher order skills that contribute to a more productive workforce. (Treasury 2010) … the demands of the ‘information age’ increasingly require higher level skills that are best acquired through formal education and training. Such skills are of two kinds: specific and generic. Both are important, but the innovation and adaptation that underpin productivity growth are placing increasing demands on the more general analytical, discovery and communication skills. These are grounded in the literacy and numeracy acquired progressively at school and developed through higher education. (Banks 2012, p. 11)
2 A profile of literacy and numeracy skills in Australia The measures of literacy and numeracy skills used in the analysis are outlined in section 2.1. Australians’ literacy and numeracy skills vary across demographic groups (section 2.2) and labour market outcomes (section 2.3). 2.1 How are literacy and numeracy skills defined and measured? The Australian Bureau of Statistics (ABS) conducted the Programme for International Assessment of Adult Competencies (PIAAC) survey during 2011–12 on behalf of the Organisation for Economic Co-operation and Development (OECD). The survey has been conducted across 23 countries and the Russian Federation. Respondents were given various tasks to assess their skills in three domains: literacy; numeracy; and problem solving in a technological environment. The focus in this paper is on the literacy and numeracy skill domains, where: • literacy is defined as ‘understanding, evaluating, using and engaging with written texts to participate in society, to achieve one’s goals, and to develop one’s knowledge and potential’ (OECD 2012b, p. 20), and• numeracy is defined as ‘the ability to access, use, interpret and communicate mathematical information and ideas, in order to engage in and manage the mathematical demands of a range of situations in adult life’ (OECD 2012b, p. 34).For each domain, each person’s skill was estimated with a test score ranging from 0–500. Five skill levels were defined within this range (table 2.1). Appendix A contains more information on the derivation of test scores and associated skill levels. Few people attain skill level 5; this can result in large standard errors for estimates of this part of the population. As a result, the ABS typically combines skill levels 4 and 5. This approach is also adopted in this paper. Level one and below level one 14 LITERACY AND NUMERACY SKILLS IN AUSTRALIAare also combined in presenting results, although the quantitative analysis itself is conducted with the test scores. 1 The quantitative analysis was also based on 10 ‘plausible values’ for each person’s literacy and numeracy skills. This required ‘Rubin’s rules’ to compute test scores for literacy and numeracy taking into account each plausible value (appendix A describes this process).
2.2 A profile of literacy and numeracy skills in Australia In 2011–12, 14 per cent of the population had relatively low literacy skills (at or below level 1) (table 2.2). These people could, at best, read only relatively short texts from which they were able to locate only a single piece of information. In contrast, 16 per cent of the population had high (level 4/5) literacy skills. These people can make complex inferences and evaluate subtle truth claims or arguments in lengthy or multiple texts. Skills are measured on a continuum, and the majority of the population have literacy skills somewhere in between these levels. In numeracy, 22 per cent of the population had skills at or below level 1. These people could carry out one-step or simple processes such as counting where the mathematical content is explicit with little or no text or distractors. At the other end of the distribution, 12 per cent of the population had relatively high (level 4/5) numeracy skills. People with high numeracy skills can understand a broad range of mathematical information that may be complex, abstract or embedded in unfamiliar contexts. Descriptions of the types of tasks that correspond to each skill level are in tables A.1 and A.2 for literacy and numeracy, respectively.
2.3 Literacy and numeracy skills by labour market outcomes People with greater human capital (including literacy and numeracy skills) are likely to have better labour market outcomes than people with lower skills. More skilled people are more likely to participate in the workforce because their returns from working are higher than returns for people with lower levels of literacy and numeracy. As might be expected, across all age groups, the literacy and numeracy skills of employed people are higher than the skills of people not in the labour force (figure 2.7).6 Shomos (2010) found a similar pattern in 2006 — people in the labour force (employed and unemployed) had higher document literacy skills than persons not in the labour force, across all age cohorts. 6 Note that some of these differences may not be statistically significant. Differences in literacy and numeracy skills by labour force status vary across age cohorts. These differences are smallest for those under 25. Some young people who are still in education (and therefore potentially higher skilled) are not in the labour force: this contributes to raising the average scores of those not in the labour force. In contrast, for people aged 25–44 years, the differences in skills between those employed and those not employed are larger. PROFILE OF LITERACY AND NUMERACY 27 200 225 250 275 300 325 15-24 25-34 35-44 45-54 55-64 65-74 Employed Unemployed NILF 200 225 250 275 300 325 15-24 25-34 35-44 45-54 55-64 65-74 Employed Unemployed NILF
18 As noted in chapter 2, both literacy and numeracy were lower for immigrants from a non-English speaking background. This could occur because the tests were done in English. 3.3 Conclusion Literacy and numeracy skills are an important component of human capital and higher levels of human capital are linked to better labour market outcomes. People with higher literacy and numeracy skills are, on average, more likely to participate and have higher wages than people with lower skills (chapter 2). The multivariate analysis in this chapter showed that, all else equal, an increase in literacy and numeracy of about one skill level is associated, on average, with an increased likelihood of employment of about 2 to 4 percentage points and 10 per cent higher wages. Having estimated the potential returns associated with an improvement in skills and labour market outcomes, another question is how to improve literacy and numeracy.Literacy and numeracy skills can be acquired in many ways, including during early childhood, through formal education, through on-the-job learning, and in day-to-day activities (chapter 1). This paper did not consider how important each of these factors is for developing or maintaining literacy and numeracy skills. The results in this chapter do, however, suggest a strong link between educational attainment and literacy and numeracy skills in explaining labour market outcomes. Literacy and numeracy account for up to 40 per cent of the association between educational attainment and labour market outcomes. The results are consistent with education producing other skills and knowledge that are valued in the workplace such as higher order skills and non-cognitive skills, including perseverance and leadership (Barrett 2012). Although education and literacy and numeracy are closely related, the analysis in chapter 2 highlighted that any increase in literacy skills since 2006 was probably small and numeracy skills were unchanged between 2006 and 2011–12. This was despite increases in educational attainment over that period. People with higher levels of literacy and numeracy can understand information from dense texts and complex or abstract mathematical information. Improving literacy and numeracy is likely to lead to increases in other components of human capital, such as knowledge and higher order critical thinking. Improving these other aspects of human capital is also important for labour market success. To summarise, literacy and numeracy skills are an important component of a person’s human capital, and contribute to the development of other aspects of human capital. The modelling in this chapter demonstrated that, all else equal, there are strong links between literacy and numeracy skills and employment and wages.
A Literacy, numeracy and problem solving measures in PIAAC The 2011–12 Programme for the International Assessment of Adult Competencies (PIAAC) is an international survey coordinated by the Organisation for Economic Co-operation and Development (OECD). It has been conducted in 23 OECD countries — as well as the Russian Federation — using survey instruments that adhere to a common set of technical and quality assurance guidelines (Caldwell and Webster 2013; OECD 2010b). The PIAAC survey complements the Programme for International Student Assessment (PISA), and follows the 2006 Adult and Literacy and Life Skills Survey, and the 1998 International Adult Literacy Survey (IALS). Much of the PIAAC survey methodology draws on these preceding surveys. The analysis in this report is based on preliminary Australian PIAAC unit record data that were released by the Australian Bureau of Statistics (ABS) in February 2013. The survey provides information about survey participants across three separate skill domains: • literacy• numeracy• problem solving in technology-rich environments.
The collection of PIAAC data in Australia is briefly described in box A.1.
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