Reconciling heterogeneous results on the returns to skills in Africa

ABSTRACT

Recent evidence indicates substantial heterogeneity in the returns to skills across countries, but only a few studies have explained the varying patterns in the return to skills. Using the 2013 STEP data for Ghana and Kenya, we estimate the causal effect of cognitive and noncognitive skills on a large set of labour market outcomes by controlling for important predetermined variables. We find that cognitive skill remains an important predictor of labour market outcomes but its effect is largely mediated by the year of schooling. We document that the labour market effects of noncognitive skills are smaller than reading proficiency, but with large variation across labour market outcomes. Interestingly, we show that schooling does not mediate the effect of noncognitive skills, meaning most of these skills are acquired outside the classroom. A decomposition analysis shows that local labour market characteristics, such as formal jobs and skilled labour demand, explains the lion share of the heterogeneity whereas the job-skill matching quality plays a significant role in the unexplained part.

KEYWORDS:

• Cognitive skills
• noncognitive skills
• earnings
• labour market outcomes

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Based on item response theory, the plausible values methodology allows one to reduce the measurement error inherent in largescale surveys and to report comparable performance scales because survey participants respond only to a subset of the assessment items (Acosta, Muller, and Sarzosa 2015).

2. Adding controls for household and parental characteristics at the age of 15 attenuates the estimated coefficient but does not alter the significance of the relationship.

3. We closely follow Acosta, Muller, and Sarzosa (2015) who used STEP data for Columbia and found that these instruments are valid in first stage per the Sargan–Hansen test. They also found that most of the results are similar to the ordinary least squares.

4. This approach is similar in principle to Meng (2004) in estimating the within-firm gender wage gap.

5. See Fortin, Lemieux, and Firpo (2011) for a review.

6. We used also other market institution variable such nation’s social welfare system, employment condition and job security (contract and permanent jobs). However, these variables are highly correlated with the informal sector.

7. Summary statistics are reported in appendix A.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [18K18266].

Notes on contributors

Christian S. Otchia

Dr. Christian S. Otchia is an associate professor of Development Economics at the Graduate School of International Development, Nagoya University, Japan, where he teaches Development Microeconomics and Industrial Development. He is also visiting professor Kwansei Gakuin University in Japan and an affiliate member at the African Growth and Development Policy modeling consortium. His research interest includes the design and evaluation of industrial skill development policies and labor market analysis.

Shoko Yamada

Dr. Shoko Yamada is a professor of education and development at Nagoya University, Japan. She has conducted various researches on education in Africa, with a focus on TVET and skills development. In the last few years, she has been leading the Skills and Knowledge for Youths (SKY) research project which has assessed the skills of industrial workers using the evaluation tools developed uniquely by the project.