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Editorial Articles

volume-3, 20-26 April,2019

Understanding Linkages between Skills, Education and Earnings

Dr. Megha Shree, Dr. P. Geetha Rani

and Dr. Rajesh Shukla

Skilling has emerged as a buzz word in the policy environment. The thrust for a policy-backed Skill Development Initiative is a significant step towards realizing the potential of the Indian workforce by enhancing its skill-ability and thus employability. The Skill India initiative seeks to strengthen institutional training, training of trainers, infrastructure and leveraging of public infrastructure so as to enhance employment both nationally and internationally for the attainment of sustainable livelihoods of the majority workforce. However, there remains a huge gap between the current levels and the desired goals in terms of creating a higher or threshold level skilled workforce, so as to see India as a developed nation in the near future. But, the proportion of formally skilled workers in India is extremely low at 4.69% of the total workforce compared to China's 24%, 52% in the US, 68% in the UK, 75% in Germany, 80% in Japan and 96% in South Korea. It is clear that India lags far behind.

The foremost challenge is the existence of a huge proportion of unskilled or poorly trained workers in the informal sector wherein the largest employment generation occurs in the country. The major challenge is that though the net enrolment rate in primary education (grades 1-5) is almost universal, almost half of the enrolled children dropped out from school, and entered the workforce without acquiring the basic numeracy and literacy skills. Thereby, the large majority of skill training is carried out through self-taught practices, observation or transfer of skills from a master craftsperson to an apprentice. Though the National Skill Qualification Framework makes efforts to provide the skilling of a largely unskilled workforce, it needs to go a long way in this regard.

Yet another concern in India is the mismatch between skill, academic training,and employment and this has broadened to such an extent, on the one hand, employers are unable to discover suitably trained people, while on the other, the youth is unable to find the aspired jobs. According to the latest India Skill Report (2019), mere 45.6% of youth graduating from educational institutions are employable. In this context, it is imperative to understand the levels of skills, their demand and the 'returns to skill' concepts.

It is an inevitable fact that a better-skilled person always remains in a better position in terms of earnings. But to understand the impact of skills on employment and earnings one needs to take a closer and analytical look at it.  The International Labour organization concept on The International Standard Classification of Occupations (ILO, ISCO-08) provides a framework to make it possible to compare occupational data internationally. ISCO-08 does not seek to substitute existing national classification of occupations but enables inter-country comparisons by aligning occupational classifications to ISCO-08 in concept and structure.

In the Indian context, many studies estimate returns to education at the national level using NSSO data, India Human Development Surveys I and II (IHDS), National Survey Data on Savings Patterns of India, etc.  But, there are hardly studies that investigate the labor-market return on skill due to the absence of skill-based earning data.

Skills measurement:

To bridge this gap, ICE3600 (2016) survey of 60,360 households and 2,50,720 individuals covering multi-dimensional aspects of the economy, society, and polity plays a crucial role. Geographically, the sample has been drawn from across 216 districts, 1217 villages and 487 towns spread across 25 major states. By applying ISCO-08 concepts to ICE3600 survey (2016), authors have classified the skill levels, where skill is defined as the ability to carry out tasks and duties of a given job for which the person earns a remuneration. This corresponds to 62.4% of the total population who belong to the working-age group of 15 to 65 years who are eligible to work excluding students and those unable to work.

Type of Skill levels

Skill Level                                                            Definition                                                                           Examples

Level 1                                                   Skills involving simple and routine            Hawker, Street vendor,Gardner, 

                                                                physical or manual tasks                              Cook, Household servant,

Construction worker, Mason, etc.

Level 2                                                   Skills involving the operation of                                 Plumber, Electrician, Artisan,

                                                                machinery and electronic                             Barber, Mechanic, Tailor, etc.


Level 3                                                   Skills involving written records                   Clerical, Supervisory level, etc.

                                                                of work, simple calculations, good

                                                                personal communication skills in

                                                                specialized fields              

Level 4                                                   Skills involving decision making                                 Doctor, Lawyer, Chartered

and creativity based on theo-                     Accountant, Engineer, Architect,

                                                                retical and factual knowledge                    Scientist, Actor, Author, etc.


Workforce Profile by Skill levels:

Little above half (56%) of the labour market is dominated by people who are classified as Type 2 skill level while 30% constitutes skill level 1 type. Nearly 11% of the population can be classified at skill level 3 while the smallest share is that owes skill level 4.

It is not surprising that higher skill level individuals reside in urban areas, due to the availability of numerous employment opportunities. On the contrary, a mere 26% of skill level, 2 individuals residing in urban areas.

Slightly more than over half of skill level 1 individual are in the 15-35 years' age group. This is a serious cause of concern that a major share of young India possesses low skills only. The rest that is about 40% of the young workforce consists of other skill levels.

As one would expect, there is a high correlation between skill level and education. Higher the education, higher the skill level. It can be clearly seen that only 3% of skill level 1 individual have high educational qualifications compared to 65% of workers of skill level 4. 

Even within the same employment type, there are significant differences in earnings across different skill levels. A regular salaried earner, at skill level 4, on an average makes Rs 500,000 a year (US $7000) which is about 2.2 times higher than his counterpart at skill level 1.

Data suggest that individuals who are classified as having skill level 4 have the highest average annual individual income of Rs. 420,000 (US $6000 based on the average exchange rate in 2019). This is about 1.5 times higher than that of a worker with skill level 3 (Rs 280,000 or US $4000). This person's earning is approximately 2.4 times higher than that of skill level 2 type worker (Rs 176,000 or US $3000). This worker, in turn, has an income that is 3.1 times higher than that of his skill level 1 (Rs 137,000 or US $2000) than his counterparts. The divergence in earnings between skill levels is quite apparent. The contributing factors are many, viz. Education, age, gender, region, etc.

Factors contributing to variations in returns to skills:

Characteristic corresponds to the labour force is that the higher skill levels are dominated largely by higher educated workers, while casual jobs are offered to those with lower educational qualifications. In the past, there was no advantage for female workers to be highly educated as it did not translate into higher wage earnings when compared to their not-so well-educated counterparts. But in recent times, factors such as age, education, skill levels, gender, a sector of employment as well as digital access play key roles in income differentials. These correlations have been established using robust statistical exercises.

Gender is a key determinant in the earnings differential. Males earn almost 1.2 times the wages earned by females. This earning gap gives men an advantage in the overall job market. However, there has been a healthy upswing in the share of females being recruited for jobs with higher skill levels.

Skill and education linkages are critical to assessing returns to skills: the central idea being that there is a premium on higher education and hence better-educated workers receive higher earnings. Age is normally associated with the person's experience and thus plays a key role in determining the earnings. At the basic skill levels - i.e. 1 and 2 - the earnings increase with age but the rate of increase is marginal. While entry-level workers at skill levels 3 and 4 belong to the age group of 21 to 25 years, implying that there is certain minimum education needed to accomplish these higher order skill levels and therefore higher earnings. This further widens the gap between workers at skill levels 1 and 2 in relation to those at skill levels 3 and 4

Earnings by levels of education are illustrated with the age-earnings profiles of the population in the 15-65 years' group. As expected, there is a clear positive relationship between levels of education and earning as experience and on-the-job training adds to improved skills over the years. This relationship is strengthened as one moves up in the educational ladder

Regular salaried income offers a foreseeable income stream and is most likely to be associated with better job security. Only 13% of skill level 1 worker report that they are paid a regular salary. In contrast, 60% of workers classified as skill level 4 earns regular salaries. Skill level 1 workers, on the other hand, receive 75% of their earnings from non-agriculture wage labour as daily wages. It is important to note that skill level 3 and 4 workers are concentrated in regular salaried and self-employed non-agriculture occupations. This wide disparity in skill levels of the labour force is a cause for concern in terms of employability.

Digital usage has widened the earnings differential across skill levels. Our data shows that as skill levels rise, ICT usage too grows. Besides, the use of internet at the individual level also shows a positive relationship with returns to skills. The Internet-using individual earns more than double that of non-users. For example, if an average Indian earns Rs 100, the ICT user earns Rs 169 while the non-ICT user's earning is only Rs 80. This is evident across all skill level types. Based on this, one can argue that internet usage plays a vital role in increased earnings.

Yet another variation in earnings can be from the dwelling units of the workforce. More than three-fourths of skill level 4 workforce resides in pucca houses while only 35% of skill level 1 worker do so. Household amenities like tap water, a separate kitchen, an in-house toilet, and liquified petroleum gas (LPG) stove are mostly to be found in the houses of skill level,4 workers. The home conditions of the workers with skill level 4 are indeed superior in terms of various household amenities. However, access to electricity connections is a common feature across all skill level type households.

Clearly, this skill level concept can help us better understand the connection between earnings and quality of labour force. Such analysis is likely to provide important insights regarding the skill levels, which would require re-qualification and re-specialization of the labour force in order to compete in fast-changing globalized India. It can further be used to retrain and equip the workforce with adequate skills. At the concluding note, a substantial share of the population is still at skill levels 1 and 2 (86%) and is thus earning much lower than those with skill levels 3 and 4. This is a huge concern for policymakers as well as the youth of India. There is an urgent need to take a serious look at the education system including technical vocational training in order to correct the anomalies that currently exist and enable the growing workforce to respond to the demand for skilled workers as well as improve their earnings.

Dr. Megha Shree is Research Fellow at PRICE, Email: megha.shree@ice 360.in

Dr. P. Geetha Rani is an Associate Professor at NIEPA, Email: geethselva@gmail.com.

Dr. Rajesh Shukla is Director and CEO at PRICE, Email: rajesh.shukla@ice360.in.

Views expressed are personal.

(Image Courtesy : Google)