How returns to skills depend on formal qualifications

Using PIAAC (Programme for the International Assessment of Adult Competencies) data for 21 countries, we study interrelationships between formal qualifications, cognitive skills, and labour market outcomes, focusing on comparisons between less and intermediate-educated adults (i.e. between adults with a degree below the upper secondary and at the upper secondary level). Less-educated adults tend to have lower cognitive skills than intermediate-educated adults, yet both groups are internally heterogeneous. In country-specific individual-level regressions, cognitive skills partly explain the lower occupational status of less-educated adults, but cross-national variation in their disadvantage remains substantial after accounting for skills. Country-level regressions show that the remaining disadvantage increases with the aggregate skills gap and with the internal homogeneity of the two educational groups. We further show that the association between skills and occupational attainment is weaker among the less educated than among the intermediate group. These findings are consistent with the idea that employers statistically discriminate on the basis of formal qualifications.