the correlations between education and earnings

8/8/2019 THE CORRELATIONS BETWEEN EDUCATION AND EARNINGS

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H i g h er E d u c a t i o nElsevier Publishing Company , Amsterdam - Printed in the Netherlands

T H E C O R R E L A T I O N B E T W E E N E D U C A T I O N A N D E A R N I N G S :W H A T D O E S I T S I G N I F Y ?

M A R K B L A U GU n iv e rs it y o f L o n d o n , I n s t i t u t e o f E d u c a t i o n

a n d L o n d o n S c h o o l o f E c o n o m i cs , L o n d o n , E n g l a n d

W e s e e m t o b e i g n o r a n t in o u r u n d e r s t a n d i n g o f t h e d e t e r m i n a n t s o f t h ed e r i v e d d e m a n d f o r l a b or w i t h d i f f e r e n t a m o u n t s o f s c ho o li n g.

I t i s c le a r t h a t , i n g e n e ra l , e m p l o y e r s o f f e r h i g h e r p a y t o m o r e h i g h l ye d u c a t e d w o r k e r s, b u t o u r k n o w l e d g e o f w h a t e l e m e n t s o r in g r e d ie n t s o fs c h o o li n g m a k e p e o p l e m o r e p r o d u c t i v e i s s c a n ty .l s i t w h a t t h e y h a v e le a r n e d in s c h o o l, a s m e a s u r e d b y t e s t sc o r e s ? O r iss c h o o li n g v a l u a bl e f o r t h e p a t t e r n s a n d m o d e s o f t h o u g h t a n d b e h a v i o r itd e v e l o p s i n p e o p l e ? O r d o e s s c h o o l i n g m e r e l y s e r v e a s a s c re e n i n g d e v i c et h a t i d e n t i f i e s t h e m o r e a b l e , h i g h l y m o t i v a t e d y o u n g p e o p l e i n o u r s o -c i e y ?

LEE HANSEN (1970)

ABSTRACTThis paper examines three alternative explanations of the basic finding that amounts of educa-

tion and personal earnings are positively correlated in some 30 countries studied. Arbitrarily labelled(1) the "eco nomic", (2) the "sociological" and (3) the "psychological" explanation, (1) argues thatbetter-educated people earn more because education imparts vocationally useful skills that are inscarce supply; (2) propounds that they do so either because length of schooling is itself correlated withsocial class origins or because education disseminates definite social values which are prized by theruling elite o f a society; (3) contends that education merely selects people in accordance with theirnative abilities and, obviously, abler people earn more than less able ones.

The question is asked: Are these really conflicting explanations? It is concluded that a properappreciation of the economic explanation in fact assimilates the othe r two. In a perfectly competitivelabour market, earnings will necessarily reflect the relative scarcity of "vocational ly useful skills," andthe vocational skills must include the possession of values and drives appropriate to an industrialenvironment. In the absence of competitive pressures, however, earnings may reflect purely conven-tional hiring practices. In the final analysis, therefore , the question posed by the paper hinges on thestrength of competitive forces in the labour markets. The question whether education contributes toeconomic growth turns out likewise to depend on the presence or absence of competitive labourmarkets.An analysis is made of the internal logic of the three explanations. Also examined is the smallquantity of direct evidence available on the link between education and the productivity of workers.An attempt is made to view familiar questions from a new angle and to relate the education-causes-growth debate to content ious issues in the field of educational planning.

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L e e H a n s e n ' s w o r d s p r o v i d e u s w i t h a t e x t f o r t h is s e r m o n . 1 W e b e g i nb y n o t i n g a r e m a r k a b l e f a c t o f l if e : b e t w e e n a n y t w o g r o u p s o f i n d iv i d u al s o ft h e s a m e a g e an d s e x, t h e o n e w i t h m o r e e d u c a t i o n w i ll h a v e h i g h e r av e r ag ee a rn in g s t h a n t h e o n e w i t h l es s, ev e n i f t h e t w o g r o u p s a re e m p l o y e d i n t h es a m e o c c u p a t i o n a l c a t e g o r y i n t h e s a m e i n d u s t r y . T h e u n i v e r sa l i t y o f t h isp o s i ti v e a s s o c i a ti o n b e t w e e n e d u c a t i o n a n d e a rn i n gs is o n e o f t h e m o s t s tr ik -i n g f i n d in g s o f m o d e r n s o c ia l s c ie n c e . I t is i n d e e d o n e o f t h e f e w s a fe g e n e -r a li sa t io n s t h a t o n e c a n m a k e a b o u t l a b o u r m a r k e t s i n a ll c o u n t r i e s , w h e t h e rc a p i ta l is t o r c o m m u n i s t . 2 T h e q u e s t i o n i s w h a t c a n a c c o u n t f o r t h is p h e n o m -e n o n ? I t s e e m s t o m e t h a t t h e r e a r e b a s i ca l ly o n l y t h r e e e x p l a n a t i o n s t h a tm e r i t a n y a t t e n t i o n , a ll o f w h i c h a re h i n t e d a t i n L e e H a n s e n ' s s t a t e m e n t .S i n c e i t w i l l b e c o n v e n i e n t t o h a v e l a b e l s f o r t h e m , I s h al l a r b i t r a r i l y c a llt h e m t h e " e c o n o m i c e x p l a n a t i o n , " t h e " s o c i o lo g i c a l e x p l a n a t i o n " a n d t h e" p s y c h o l o g i c a l e x p l a n a t i o n . " T h e y c o r r e s p o n d , r o u g h l y s p e ak i n g, t o t h r e ea p p a r e n t l y c o n f l i c ti n g p r o p o s i t i o n s : ( 1 ) t h a t e d u c a t i o n i m p a r t s v o c a t i o n a l l yu s e f u l s k i ll s t h a t a re i n s c a rc e s u p p l y ; ( 2 ) t h a t e d u c a t i o n d i s s e m i n a t e s d e f i -n i t e s o c ia l v a l u es , in e f f e c t re c r u i t i n g p e o p l e i n t o t h e r u l in g e l it e o f a s o c i e t y ;a n d ( 3 ) t h a t e d u c a t i o n m e r e l y s e l ec t s p e o p l e in a c c o r d a n c e w i t h t h e i r a bi li -t ie s. I n s o l a b e ll i n g t h e s e p r o p o s i t i o n s , I d o n o t m e a n t o d e n y t h a t , s a y , s o m ee c o n o m i s t s b e li e v e t h a t ( 2 ) is a b e t t e r e x p l a n a t i o n o f th e c o r r e l a t i o n b e t w e e ne d u c a t i o n a n d e a rn i ng s t h a n ( 1 ) , b u t s im p l y t h a t t h e t h r e e p r o p o s i t i o n s s e e mt o e c h o t h e j a r g o n a n d t o r e f l e c t th e p r e va i li n g m o d e s o f t h i n k i n g o f t h et h r e e r e s p e c t i v e s o c i al s c ie n c e s. A t a n y r a t e , n o t h i n g t h a t f o l l o w s d e p e n d s i na n y c r i t i c a l w a y o n t h e p a r t i c u l a r l a b e l s I h a v e c h o s e n .

T h e p o i n t o f t h i s p a p e r i s t o a s k : A r e t h e s e r e a l ly c o n f l i c t i n g e x p l a n a -t i o n s , o r a r e t h e y a ll t r u e i n t h e i r o w n w a y ? A n d i f t h e y a re a ll t r u e i n t h e i ro w n w a y , w o u l d i t m a k e a n y d i f fe r e n c e i f o n e o f th e m w e r e n ea r e r t h e t r u t ht h a n t h e o t h e r s ?

1. T h e E c o n o m i c E x p l a n a t i o nW e m a y a s w e ll b e g i n w i t h t h e " e c o n o m i c e x p l a n a t i o n " s in c e t h is is t h e

m o s t c le a rl y f o r m u l a t e d o f t h e t h r e e v ie w s . I t w il l b e n o t i c e d t h a t L e eH a n s e n c o m p l a i n s t h a t " o u r k n o w l e d g e o f w h a t e l e m e n t s o r i n g re d ie n ts o fs c h o o l in g m a k e p e o p l e m o r e p r o d u c t i v e is s c a n t y " ; li k e m o s t e c o n o m i s t s , h e

1 I wish to thank Richard Layard, George Psacharopoulos and Gareth Williams for helpful commentson an earlier draft o f this paper.2 The evidence for 30 countries, 10 of which are developed countries, is briefly reviewed by Blaug(1970, pp. 23-27) and more fully document ed by Psacharopoulos (1972). This sample includes nocommunist countries, but there are bits and pieces of evidence, particularly for the U.S.S.R., whichsuggest tha t communis t countries conform to the world-wide patte rn.

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takes it almost for granted that .schooling does raise the productivity ofpeople, although the later reference to "a screening device" suggests thateven economists have their doubts on the question? Now the assertion thateducation renders people more productive is liable to be misunderstood. Itseems to imply, first of all, that labour as a factor of production makes adefinite contribution to output which can be distinguished without muchdifficulty from the contribution of other factors, such as management andcapital equipment. But o f course all factors of production participate jointly inthe productive process and the separate contribu tions of each to final outputcan only be assessed at "the margin," that is, by holding constant the quantityand quality o f all the other factors.

Fur the rmore, there are many margins: every type of machine has itsown margin and, as for labour, there is a margin for each distinct attributethat enters into the hiring function of employers. A minimum list of theseattributes would cover age, native ability, achievement drive, work experi-ence, possession of specific skills, educational at tainments, and on-the-job orin-plant training received. An employer cannot normally hire one of theseattributes by itself, since each worker is a particular bundle of them, but hecan acquire them indirectly by choosing different combinations of workers.In that sense, labour as a factor of production can be viewed as a vector ofattributes, each of which has a distinct price. Thus, the proposition that"educa tion renders people more product ive" must be strictly read as "educa-tion makes the marginal worker more productive when he is furnished withthe same quantity and quality of management, capital equipment and com-plement of all other workers as before." We can now ask if the earnings ofeducated labour generally exceed those of "raw labour," everything elsebeing the same, is this evidence that the marginal product of educa ted labouris in fact greater that that of raw labour? Can we infer from observedearnings differentials associated with additional education that the marginalproduct of education is positive?

The textbook answer to this question is perfect ly familiar to everystudent of elementary economics, and all we need to do here is to sketch itsrelevance to the problem at hand. It is "yes" if there is effective competitionin labour markets. We must rely on competition between firms as producersfor "efficient" utilisation of labour and on competition between firms asemployers for "efficient" recruitment of labour. Since the demand curve forlabour is simply the schedule of the (declining) marginal revenue products oflabour, both of these propositions boil down to the basic rules of(l)profit

a Fo r e x a m p l e , A l b e r t R e e s , i n r ev i e w i n g G a r y B e c k e t ' s Human Capital (Rees , 1965 , pp . 958 -60 ) ,m e n t i o n s t h e p o s s i b il i ty t h a t t h e s u p e r i o r e a r ni n g s o f A m e r i c a n c o l le g e g r a d u a t e s a re d u e t o t h ep r e ju d i c es o f A m e r i c a n e m p l o y e r s ra t h e r t h a n t o t h e g r e a t er p r o d u c t i v i t y o f c o l l eg e - e d u c a t e d w o r k e r s .

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maximisation, (2) operating on the boundaries of the production function,and (3) hiring along the demand curve for a factor-these are all alternativeways of stating exactly the same thing. Similarly, we must rely on competi-tion between workers to change jobs in the effort to maximise the "n etadvantages" derived from work; that is, to seek higher pecuniary returnsunless they are offset by definite non-pecuniary disadvantages. Given thefulfillment of these conditions, every distinct type of labour will be paid itsmarginal product in equilibrium and hence we can indeed infer from thehigher earnings of more educated workers that the marginal product ofeducation is positive.

It is worth noting that this tells us little about the mechanism thatproduces a positive marginal product of education and, in particular, wheth-er it is due to forces on the side of demand or on the side of supply. It isperfectly conceivable, for example, that it has nothing whatever to do withthe demand for labour. Let us suppose that people with more education arealways employed in "clerical" occupations, while people with less educationare only employed in "manual" occupations; the marginal revenue productschedules of the two occupational categories happens to coincide, in thesense that identical increments of emp loymen t make identical contribut ionsto outpu t, whichever occupational class we are talking about. Nevertheless,because clerical occupations require more education and because educationis costly to acquire, the relative scarcity of clerical labour will generatepositive monetary returns to education (contrast W2 and W~ in Figure 1,ignoring D'2 for the time being).

P| w20

- - Dema nd f or "ma nua l "wo rk er s. . . . De mand f or 't l e ri c al "wor ke r s/ s 2

N2 N~ N 1 NF i g u r e 1 . D e m a n d a n d s u p p l y f o r t w o t y p e s o f l a b o u r . S u b s c r i p t 1 r e f e r s t o le s s - e d u c a t e d w o r k e r s ;s u b s c r i p t 2 t o m o r e - e d u c a t e d w o r k e r s .

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m o r e - e d u c a t e d p e o p l e is p r o o f o f t h e i r s u p e r i o r p r o d u c t i v i t y i f a n d o n l y i fl a b o u r m a r k e t s a r e c o m p e t i t i v e .

T h i s i s r e a ll y a ll t h e r e is t o t h e " e c o n o m i c e x p l a n a t i o n . " T h e e c o n o m i s td o e s n o t h a v e t o a d d r e s s h i m s e l f d i r e c t l y t o p r o d u c t i v i t y a s a v a r i a b le i n t e r -v e n in g b e t w e e n e d u c a t i o n a n d e a rn in g s. P r o v i d ed l a b o u r m a r k e t s fu n c t i o nc o m p e t i t i v e l y , e a r n i ng s a re a s a t i s fa c t o r y m e a s u r e o f p r o d u c t i v i t y a n d i n d e e din t h e l i m i t i n g c a s e o f p e r f e c t c o m p e t i t i o n , t h e y a r e an e x a c t m e a s u r e . B u tt h is i s p r e c i s e l y t h e p o i n t a t w h i c h t h e m i s g iv i n gs b e g in . I t is s a id t h a t f i r m sd o n o t r e a l ly s tr iv e t o m a x i m i s e p r o f i ts : T h e y m a x i m i s e sa le s, o r t h e i r m a r -k e t s h a re , o r t h e y s i m p l y " s a t i s f i c e , " a l l o f w h i c h m a y w e l l l ea v e t h e mo p e r a t i n g i n s id e t h e i r p r o d u c t i o n - p o s s i b i l i ty f r o n t ie r . 6 E v e n i f i t is c o n c e d e dt h a t , w h a t e v e r t h e i r m o t i v e s , a D a r w i n i a n s t ru g g l e t o su r v iv e l e a d s f i rm s" b e s t f i t t e d " t o s u rv iv e t o b e p r o f i t m a x i m i s e r s , i t is a r g u e d t h a t l a b o u rm a r k e t s a m o n g a ll m a r k e t s a r e p e c u l i a r ly p r o n e t o i m p e r f e c t i o n s o f all s o rt s.T h e i m p e r f e c t i o n s o f t h e la b o u r m a r k e t w i t h w h i c h w e ar e c o n c e r n e df o r p r e s e n t p u r p o s e s a r e n o t t h o s e t h a t u s u a l l y c r o p u p i n t e x t b o o k d is c us -s io n s o f s k i ll e d a n d u n s k i l l e d l a b o u r , s u c h a s th e i n f l u e n c e o f c o l l e c ti v eb a r g a in i n g o n w a g e d e t e r m i n a t i o n o r t h e n o t o r i o u s d is i n c li n a ti o n o f w o r k e r st o e x p l o r e j o b o p p o r t u n i t i e s o u t s i d e t h e i r o w n g e o g ra p h i c a l a re a . I t is r a t h e rt h o s e i m p e r f e c t i o n s t h a t s e e m p a r t i c u l a r ly t o c h a r a c t e r is e p r o fe s s i o n a l l a b o u rm a r k e t s . I n g e n e r a l , w h e n a c e r t a in t y p e o f l a b o u r is in s h o r t s u p p l y , t h ee m p l o y e r m u s t d e c i d e w h e t h e r t o o f f e r th e g o in g w a g e w h i le r e la x in g h ish i r i n g s t a n d a r d s , o r w h e t h e r t o m a i n t a i n h i s h i r i n g s t a n d a r d s a n d t o o f f e rh i g h e r r a t e s o f p a y . A l t e r n a t iv e l y , h e c a n d o n e i t h e r a n d i n s t e a d a t t e m p t t om a k e t h e jo b a p p e a r m o r e a t t ra c t i v e b y p r o m i s i n g t o p r o v i d e i n - p la n t t ra i n -in g. A l l t h r e e m e t h o d s o f a t t r a c t in g l a b o u r a r e c o s t l y a n d t h e m a r g i n a l r e-

6 There is the further contention associated with some Cambridge economists (Cambridge, England,not Cambridge, Massachusetts) that the concep t o f a production function is untenable, either becausetechnical change is typically "embodied" in capital accumulation, so that the function shifts as wemove along it (Kaldor, 1961, pp. 2 04-20 7), or because the stock of capital cannot be defined indepen-dently of the rate of interest or prof it (Robinson, 1953); hence, all talk of marginal product ivity mustbe ruled out as meaningless. These criticisms have been advanced in the context of aggregate growththeory and it is 'not entirely clear whethe r they are also meant to apply at the microeconomic level.Suffice it to say that even if all capital investment involved technical change, which is doubtfu l, wemight still wish to retain the concept of a production function in the theory of the firm as a usefultaxonomic device in analysing the various elements of a p roduction decision. Furthermor e, a produc-tion funct ion should logically define all inputs in terms o f flows, not stocks (Georgescu-Roegen, 1967,pp. 4 5- 56 ); the decision to measure the stock o f capital rather than the flow of machine-hours ismerely an empirical compromise. The rate of interest or profit is strictly speaking irrelevant to thenotion of a pro duction function; it is only needed when we want to talk abou t the prices of machines,in which case we have to bring in the forces of thrift in addition to productivity considerations. Allthis is not to Say that production function measurement is easy, or even that the idea of aggregateproduction functions is as meaningful as the concept of microeconomic production functions, butmerely that the question we are posing cannot be ruled ou t as irrelevant on Kaldor-Robinson grounds.

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c r u i t m e n t c o s t s a r e li k e l y to b e g r e a t e r , t h e l e ss s p e c if ic t h e s k ill t h a t is b e i n gh i r e d . I n t h e c i rc u m s t a n c e s , e m p l o y e r s t e n d t o " h o a r d " t h e i r p r o f e s s i o n a lw o r k e r s , t h a t i s , t o t r e a t t h e i r s a l a r i e s a s o v e r h e a d c o s t s a n d t o r e s o r t t oc o n v e n t i o n a l r u l e s - o f - t h u m b in h i r in g t h e m t h a t h a v e p r o v e d t o b e e f f e c t iv ed i s c r im i n a n t s i n t h e p a st . O n e p la u s ib l e r u l e - o f - t h u m b is t o h i re m o r e - e d u -c a t e d w o r k e r s f o r c o m p l e x j o b s t h a t i n v o l v e i n i ti a t iv e a n d d r i v e, a n d l e s s- e d u -c a t e d w o r k e r s f o r e v e r y t h i n g e ls e; in s h o r t , t o l e a n h e a v i ly o n e d u c a t i o n a lq u a l i f i c a t i o n s a s a n i n d e x o f c e r t a i n p e r s o n a l c h a r a c t e r i s t ic s .

T h i s b r in g s u s s q u a r e l y t o o n e o f th e p r i n c ip a l e c o n o m i c f u n c t i o n s o fe d u c a t i o n a l s y s te m s , n a m e l y , t o c e r t i f y t h e c o m p e t e n c e o f s t u d e n t s , i f o n l yc o m p e t e n c e t o p a s s e x a m i n a t i o n s . " S k i l l l a b e l l i n g " b y p a p e r q u a l i f i c a t i o n s ,a s H a r v e y L e i b e n s t e i n ( 1 9 6 5 ; 1 9 6 9 ) c a lls i t, is a u s e f u l s o c ia l i n v e n t i o n b e -c a u s e i t re d u c e s h i r in g c o s t s in l a b o u r m a r k e t s b y e l i m i n a t in g t h e n e e d t o t e s tt h e t y p e a n d d e g r e e o f s ki ll o n e v e r y o c c a s i o n t h e s k ill is b o u g h t . B u t t h e r e iso b v i o u s l y a g r e a t d e a l o f h i s t o r y a n d t r a d i t i o n i n s ki ll l a b e ll in g w h i c h is o n l yr e m o t e l y c o n n e c t e d t o c u r r e n t d e m a n d s i n th e l a b o u r m a r k e t . I t is h a r d t ob e li ev e , f o r e x a m p l e , t h a t t h e l e n g t h o f c o u r se s , w h i c h i n m o s t c a se s h a sr e m a i n e d t h e s a m e f o r g e n e r a t i o n s , i s n o w o p t i m a l f o r t h e p a r t i c u l a r sk ill s t h a ta r e la b e l le d . I t is a ls o o b v i o u s t h a t t h e " p r o f e s s i o n a l i s a t i o n " o f c e r t a i n o c c u p a -t io n s , l ik e m e d e c i n e , d e n t i s t r y , t e a c h i n g , la w a n d a c c o u n t a n c y i n v a r ia b l y l e a d st o l o n g e r c o u r s e s a n d m o r e t e c h n i c a l s y ll ab u s e s, th u s e f f e c t i v e l y l im i t i n g e n t r yt o t h e p r o f e s s i o n b y r ai si ng t h e m i n i m u m r e q u i r e m e n t s f o r q u a l i fi c a t i o n . T h i sa c ts t o r e d u c e t h e n u m b e r o f s kills th a t a r e b e i n g l a be l le d a n d t h u s n a r r o w s t h er a n g e o f p o t e n t i a l s u b s t i t u t i o n p o s s i b il it ie s b e t w e e n d i f f e r e n t sk ill s, all o fw h i c h is t o s a y t h a t s k il l l a b e ll in g in t h e r e a l w o r l d i s f a r f r o m o p t i m a l ; w h a ts t a r te d o u t a s a n e f f e c ti v e d e v i c e fo r r e d u c i n g t h e c o s t s o f o b t a i n i n g i n f o r m a -t i o n e n d s u p a ll t o o f r e q u e n t l y a s a p o t e n t s o u r c e o f t h e m a l u t i l i s a t i o n o fl a b o u r .

O n t h e s u p p l y s id e , t h e r e a r e a ll t h e i n h e r e n t d i f fi c u l t ie s o f r a p i d l yd i ff u s in g i n f o r m a t i o n a b o u t a l t e rn a t i v e j o b o f fe r s th r o u g h o u t l a b o u r m a r -k e t s , a s w e l l a s t h e p a t e n t i n a d e q u a c y o f v o c a t i o n a l c o u n s e l li n g i n s c h o o l sa n d t h e w e i g h t o f n o n - v o c a t i o n a l f a c t o r s i n c h o o s i n g c a r e e rs . B e s i de s , e d u c a -t i o n a l c y c l e s a r e l o n g , a n d i n m a n y c o u n t r i e s i t is d i f f i c u l t t o c h a n g e c o u r s e so r fi e ld s o f s t u d y h a l f - w a y t h r o u g h t h e c y c l e . T h e l o n g e r w e t h i n k a b o u ts u c h e l e m e n t s i n t h e s i t u a t i o n , t h e l e ss w e a r e w i l li n g t o b e l i e v e i n t h e f r e ep l ay o f c o m p e t i t i v e f o rc e s t h a t s u p p o s e d t o br in g l a b o u r m a r k e t s a u t o m a -t ic a l ly i n t o e q u i l i b r i u m . 77 Shortages (excess demand for labour) mean that people are paid less than their marginal products,and surpluses (excess supply of labour) mean that they are paid more. This follows from the fact thatthe feasible wage-employment region in a Marshallian diagram of the labour market is bou nde d by thedemand curve at wage rates above the equilibrium rate and by the supply curve at wage rates belowthe equilibrium rate.

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T h e r e is t h e f u r t h e r d i f f i c u l t y t h a t i n m o s t c o u n t r i e s a n y t h i n g f r o mo n e - t h i rd s t o t w o - t h i r d s o f a ll h ig h l y q u a l if ie d m a n p o w e r is e m p l o y e d in t h ep u b l i c s e c t o r a t a d m i n i s t e r e d p a y s ca le s, w h i c h g e a r e a r n i n g s d i r e c t l y t op a p e r q u a l if ic a t io n s w i t h o u t a n y e f f o r t t o c h e c k w h e t h e r m o r e e d u c a t i o nm e a n s b e t t e r j o b p e r f o r m a n c e . 8 I f t h e p r i v a t e s e c t o r s et s t h e ra t e o f p a y f o rt h e p u b l ic s e c t o r , t h e f a c t t h a t t h e m a r g in a l p r o d u c t o f l a b o u r is d i f f ic u l t t od e f i n e i n t h e p u b l i c s e c t o r r a is e s n o s p e c ia l p r o b l e m s : E a r n i n g s i n t h e p u b l i cs e c t o r w i ll r e f l e c t t h e m a r g i n a l r e v e n u e p r o d u c t o f l a b o u r i n t h e e c o n o m y .B u t t h e p u b l ic s e c to r m a y d e c i d e t o p a y m o r e t h a n t h e m a r g i n a l r e v e n u ep r o d u c t o f l a b o u r t o e a se i ts r e c r u i t m e n t p r o b l e m s - a s a p p ea rs t o b e t h e c as ein B r it a in ( S c i to v s k y , 1 9 6 6, T a b l e 9 ) - o r t o p a y le ss t o c re a t e e m p l o y m e n to p p o r t u n i t i e s - a s in m a n y u n d e r d e v e l o p e d c o u n t ri e s. O u r o n l y t es t o f " m o r e "o r " l e s s " is t h e m a r g i n a l p r o d u c t o f l a b o u r in t h e p ri v a te s e c to r . T h ec o n c e p t o f t h e m a r g i n a l p r o d u c t i v i t y h a s n o m e a n i n g i n t h e p u b l ic s e c to r ,n o t s o m u c h b e c a u s e t h e g o v e r n m e n t d o e s n o t s e l l i t s o u t p u t , s o t h a t a ni n c r e m e n t o f o u t p u t c a n n o t b e v a lu ed in m o n e t a r y t e r m s - w e c o u l d g e tr o u n d t h a t b y u s in g s o m e w e i g h t e d b u n d l e o f p h y s ic a l i n d i c a t o r s - b u t b e -c a us e g o v e r n m e n t s a r e n o t p r o f i t -m a x i m i s e rs a n d h e n c e c a n p r o d u c e a n yo u t p u t o f p u b l ic s er v ic e s t h a t P a r l i a m e n t a p p ro v e s . G o v e r n m e n t s m a y o rm a y n o t u t i l is e l a b o u r e f f i c i e n t l y w i t h i n a gi ve n b u d g e t , b u t t h e s iz e o f t h eb u d g e t i t s e lf l a c k s a n y e c o n o m i c r a ti o n a le . T h u s , t o ta l k a b o u t t h e m a r g i n a lp r o d u c t i v i t y o f t h e c i vil s e rv i c e is t o a b u s e t e c h n i c a l l a n g u a g e . I t f o l lo w s t h a tt h e l a r g e r t h e p r o p o r t i o n o f e d u c a t e d p e o p l e e m p l o y e d in t h e civ il s e rv ic e o rt h e a r m e d f o r c e s o f a n e c o n o m y , t h e le ss l ik e l y i t is t h a t g o v e r n m e n t s a la rie sw i ll b e p a s s iv e l y a d a p t e d t o s a la r ie s in p r i v a t e i n d u s t r y . O n c e t h e y a r e s e tf re e f r o m t h e c o n s t r a i n t o f h a v in g t o c o m p e t e f o r l a b o u r w i t h t h e p r i v a tes e c to r , t h e s h o e is o n t h e o t h e r f o o t . T h e t e n d e n c y to f o r c e a r ti f i c ia l ly h i g hp a y s ca le s o n p r i v a te i n d u s t r y i s c h e c k e d in t h e l o n g r u n b y t h e d e c l i n e o fp r iv a t e in v e s t m e n t a n d t h e d i s a p p e a r a n c e o f t a x r e v e n u e s ; a n d th e t e n d e n c yt o p a y b e l o w t h e p r i v a te s e c t o r u l t i m a t e l y d e f e a t s i ts e l f i n a d r a i n o f l a b o u ro u t o f t h e p u b l i c i n t o t h e p r i v a te s e c t o r. H o w e v e r , t h e s e t e n d e n c i e s m a y t a k ed e c a d e s t o w o r k t h e m s e l v e s o u t a n d i n t h e m e a n w h i l e , t h e h i g h e r e a r n in g s o fb e t t e r - e d u g a t e d p e o p l e m a y b e a r l it tl e re l a t io n s h i p t o t h e m a r g in a l p r o d u c to f e d u c a t i o n , w h a t e v e r i t is. F o r t u n a t e l y , t h e p r i v a te s e c t o r in m o s t c o u n t r i e sd o e s p a y h i g h l y q u a l i fi e d m a n p o w e r a b o v e t h e p a y s c a le s p r e v ai li n g in t h e

8 I t i s n o t p o s s i b l e t o g i v e p r e c i s e f ig u r e s f o r B r it a in . T o t h e b e s t o f o u r k n o w l e d g e - t h e m o s t r e c e n te v i d en c e d a t e s f r o m t h e R o b b i n s R e p o r t i n 1 9 6 3 a n d e v e n t h a t is n o t a v ai la b le in t h e f o r m r e q u i re d t oa n s w e r t h e q u e s t i o n - a b o u t 3 5 p e r c e n t o f a ll t h o s e w i t h h ig h e r e d u c a t i o n i n t h e l a b o u r f o rc e a ret e a c h e r s a n d a n o t h e r 1 0 p e r c e n t a r e e m p l o y e d i n t h e c iv il se r vi ce , t h e n a t i o n a l i s e d i n d u s t r i e s a n dg o v e r n m e n t r e s e a r c h s t a t i o n s . U . G . C . f i g u r e s o n t h e First Employment of University Graduates inr e c e n t y e ar s s h o w t h a t 4 0 - 4 5 p e r c e n t o f n e w g r a d u a t e s t a k e u p e m p l o y m e n t in t h e p u b l ic s e c t or .

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public sector9 and, in that sense, the marginal product of labour in privateindustry remains a key element in determining the actual structure o f salariesin the economy. Nevertheless, the high proportion of qualified people em-ployed by governments around the world must sap our confidence in thecompetitive model of professional labour markets.

All this is purely speculative. Is there no empirical evidence that we canbring to bear on the question? What in fact are the results predicted by acompetitive model of labour markets? In one sense, the model is not verypowerful: it predicts that excess demand will raise and excess supply willlower relative earnings either per job or per man; it predicts that labour ofthe same type will fetch the same price in any local labour market but not ifthat labour is employed in different occupations and under different work-ing conditions, a qualification that is frequently overlooked; it also predictsthat skills which are costly to acquire will tend to command higher earnings.The simple textbook theory of competitive labour markets is silent, how-ever, about the length o f time it takes to produce a response in situations ofdisequilibrium and it is even silent about the exact nature o f this response. 10This is precisely why the theory is difficult to test and why the evidence to dat efails to convince sceptics.Arrow and Capron (1959; see also Folk, 1970; Richardson, 1969) havedemonstrat ed tha t persistent excess demand for American engineers andscientists over a decade or so has raised their relative salaries, and others(Blaug, Layard and Woodhall, 1969) have shown that chronic excess supplyof graduates in a country like India has steadily eroded the real earningsdifferentials associated with higher education. Moreover, if the word "skill"is used in its broadest sense to refer to acquired abilities of any kind, the factthat more-educated people earn more the world over is itself evidence in fa-vour o f the competitive model. But other in terpretat ions o f these findings arepossible. At any rate, the notion that market forces broadly govern thedetermination of wages and salaries, and that therefore competitive pressuresdo make themselves felt in labour markets, has been categorically dismissedtime and again, particularly by British writers. 11 One c ommentator has gone9 This is true even in Tropical Africa and South-East Asia, although the contrary is often asserted.Some African governments in the 1950's did pay graduates more than they couM earn in the privatesector, but the stickiness of public sector pay scales and the growth of private industry has by nowrevers ed these differentials to conform to the general pattern around the world.10 But a recent co llection o f essays (Phelps, 1970) has at long last broken the ice in developing adynamic theory of labour market adjustments.l l Perhaps the mos t famous dismissal is Wootton's (1954). A recent example is Rou th (1965,pp. 144 -47) who rejects "the theory of demand and supply" on the basis of wath is, at best, thinevidence of rigidities in the British occupational pay structure since 1900; no reference is made in thebook to the existence of a well-behaved Phillips curve in the inter-war period, and the concept ofoccupations on which the argument is based, namely, the Registrar General's five social classes, is sobroad as to be almost useless for testing any theory ab out the structure of pay.

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s o f a r a s to n o t e t h a t " i t is , i n d e e d , b a d f o r m , e v e n t o u s e t h e w o r d ' m a r k e t 'i n a s s o c ia t io n w i t h la b o u r , a m o n g B r it is h m a n p o w e r a d m i n i s tr a t o r s a n d le g-i s la t o r s " ( C r o s s l e y , 1 9 7 0 , p . 1 2 7 ) . R e c e n t d i s c u s s io n s o f a v o l u n t a r y o rs t a t u t o r y i n c o m e s p o l i c y h a s f u r t h e r e n c o u r a g e d t h e m a n - i n - th e - s tr e e t v i ewt h a t w e c a n m a k e w a g e s a n d s ala ri es j u s t a b o u t a n y t h i n g w e w a n t t h e m t ob e. ~2T h i s is n o t o n e o f t h o s e q u e s t i o n s t h a t c a n b e s e t t l e d w i t h a y e s / n oa n s w e r. T h e r e s e e m s t o b e s o m e c o n s e n s u s a m o n g l a b o u r e c o n o m i s t s t h a tc o m p e t i t i v e w a g e t h e o r y is s u c c e s s f u l i n p r e d i c t i n g l o n g - r u n c h a n g e s i n o c -c u p a t i o n a l w a g e d i f f e r en t i a l s b u t , o n t h e o t h e r h a n d , i t h a s a p o o r r e c o r d inp r e d i c t i n g s h o r t - r u n c h a n g e s i n i n t e r i n d u s t r y w a g e d i f fe r e n t ia l s . 13 B e t h a t a si t m a y , w e m a y s u m u p b y u n d e rl in i n g t h e f a c t t h a t th e " e c o n o m i c e x p la n a -t i o n " o f t h e c o r r e l a ti o n b e t w e e n e d u c a t i o n a n d e a rn i ng s u l t i m a t e l y d e p e n d so n a b r o a d , e m p i r ic a l j u d g e m e n t i n f a v o u r o f t h e c o m p e t i t i v e h y p o t h e s i s . I tm u s t , in t h e n a t u r e o f th e c a s e, b e a c o m p l e x j u d g e m e n t b e c a u s e w e a red e a li ng w i t h a w h o l e s er ie s o f l a b o u r m a r k e t s , a n d s t a t e m e n t s t h a t w e c anm a k e a b o u t s o m e d o n o t n e c e s sa r il y a p p l y t o o t h e r s . T h e r e i s c le a rl y a w o r l do f d i ff e r e n c e b e t w e e n t h e l a b o u r m a r k e t f o r s e c o n d a r y s c h o o l l ea v e rs a n dt h a t f o r g r a d u a te s , t o g iv e o n l y o n e e x a m p l e , a n d I m y s e l f a m t e m p t e d b yt h e i d e a t h a t t h e r e l a ti v e l y h ig h c o s t o f g r a d u a t e s t o e m p l o y e r s a n d th er e la t iv e l y h ig h m o b i l i t y o f g r a d u a t e s m a k e g r a d u a t e l a b o u r m a r k e t s m o r es u b j e c t t o c o m p e t i t i v e p r e s s u r e s th a n m a r k e t s f o r u n s k il le d l a b o u r . B u t t h isis a n i d e a t h a t y e t r e m a i n s t o b e c l e a rl y d e m o n s t r a t e d .

12 A beautiful illustration o f this tendency is a recent outburst by Peter Hail, an eminent geographer:"We shall have to ask why I, a university professor, am paid five times as much as a dustman (and havejust been given a 10 per cent increase, representing a sum which, given to the dustman, would keephim in comf ort for years). We shall need to ask also why X, a company director, is paid five times asmuch as I am. It will be no good, is no good now, Ixying to answer this question in economic terms. I don 'tearn more than the dustman by reason of the resources put into my education (that hoary old myt h ofthe educational economists, which is purely question begging). Nor do I earn more by reason of thedemand for my services, which in the last resort is far less than that for dustmen . (Finally, I need thedustman, while, save in a strictly metaphysical sense, he doesn't need me.) No: the reason I get more isthat somewhere society has formed a haif-developed notion on this subject, and has then cemented itby social and political pressures. We shall need to find a way of breaking these lazy notions ofconsensus, and starting the whole argument from the beginning" (Hall, 1970). I count three majorand two minor fallacies in this passage, which is not of course to say that the present differentialbetween the earnings of university professors and dustmen is due to competi tion, pure and simple.Economic th eory has almost nothing to say about the precise magnitude of earnings differentials, bu tit does predic t a positive differential between university professors and dustmen, even whe n both (asin this case) are employed in the public sector and paid on pre -determined scales.

13 See Pierson (1957); Ross (1957); Periman (1969, chs. 4 and 5) and, as the best single source, thepapers in Burton e t a l . (1971).

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2. Direct evidenceSince it is so difficult to test the proposition that labour markets are

subject to competit ion, perhaps we should look for direct evidence of the"economic explanation." The well-known finding that the same job categoryas invariably filled by people with a wide range of educational qualificationssuggests immediately that we cannot expect to discover a simple link betweenschooling and the contribution of an individual to final output. There isalso the difficulty, that we spoke of earlier, of isolating the specific contribu-tion of a worker, not to mention the contr ibution of education as distinct fromother attributes of labour. Undaunted by these difficulties, however, a recentstudy by Ivar Berg (1970), revealingly e n t i tl e d E d u c a t i o n a n d J o b s : T h e G r e atT r a i n i n g R o b b e r y , collects all the available evidence for the United States onthe link between education and productivity, concluding that education gener-ally does n o t raise the productivity of workers.Berg started out by interviewing employers and found that they typical-ly justify their emphasis on educational qualifications by claiming that yearsof schooling are good evidence of the ability to get along with others-the"sociological exp lana tion"- bu t they also made frequent reference to the no-tion that more-educated workers have a greater potential to be promoted tomore responsible jobs (Berg, 1970, pp. 72 -8 0 ) - t h e "economic explanation."Somewhat more conclusive, however, is his finding that employers in suchdiverse industries as steel, rubber , textiles and packaging rarely analyse theirown hiring practices and indeed do not even record the educational qualifica-tions of all workers on their personnel record cards (Berg, 1970, pp. 78-79,9 2 - 9 4 , 117). ~* The absence o f some sort of manpower planning at thefactory level is indeed strongly suggestive of purely conventional hiring prac-tices.Next, Berg examined evidence from "job analysis," that is, the attemptto delineate and quantify the skill conten t of jobs and to relate these tominimum educational requirements for effective performance in jobs. Hemade liberal use of a carefully designed study of "worke r trait requirements"by the United States Employment Service. It examined the minimum re-quirements o f a job in terms of what was called "general educational devel-opmen t" (GED) and "specific vocational preparat ion" (SVP) categories,covering a wide sample of about 4,000 jobs listed in the American D i c t i o n -a r y o f O c c u p a t i o n a l T i t l e s in both 1956 and 1966. A brief word of explana-tion o f the method is required to grasp the use that Berg made of the data:The GED scale covers reasoning ability, mathematical skills and language1,1 A s i m i l a r f' m d i n g i s r e p o r t e d f o r s o m e B r i t i s h e l e c t r i c a l e n g i n e e r i n g f i r m s ( B l a u g , P e s t o n a n dZ i d e r m a n , 1 9 6 7 , p . 2 7 ) .

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competence; each of these is measured separately on an ordinal scale in sevensteps, and the final estimate of the requirements o f a job is simply thehighest rating the job receives on each of the three scales. Because of varia-tions in the quality of schooling throughout the 50 States of the Union andbecause o f the possibility that work experience can make up for any lack ofGED, the E mpl oym ent Service disavowed any at tempt to translate GED intoyears of schooling, although SVP was in fact expressed in terms of trainingweeks. Some years ago, Richard Eckaus (1964) translated the GED cate-gories in the first of the two surveys into what he believed to be equivalentyears of schooling and combined these with the length of time specified forthe SVP categories; applying these estimates to the American occupationalcensus of 1940 and 1950, he classified the entire labour force in each majorsector of the economy by its "education and training requirements" in thetwo census years and arrived at the dramatic finding that there was a "sur-plus" of high school graduates in 1950 but a "shor tage" of college graduates.Berg extends Eckaus' me thod to the 1966 version of the worker traitsrequirements study, but he goes well beyond Eckaus in presenting multi-valued rather than single-valued conversions. He admits candidly that theresults depend entirely on how "requirements" are matched with "achieve-ments ," that is, on the actual relationship of GED and years of schooling,which is Of course precisely what we want to know. To surmount thisdifficulty he uses a range of plausible equivalences and comes to the con-clusion that "whe ther there is a shortage or an 'excess' of college graduates[in 1966] depends on whether jobs requiring a GED of 5 are regarded asjobs for college graduates or as jobs that can be performed adequately bypersons who have graduated from high school and have undergone somecollege training" (Berg, 1970, p. 51). In plain language, you can make theanswer come out any way you want to! In extending Eckaus' methods, Berghas in fact undermined this approach to measuring the educational require-ments of jobs? s

The rest of Berg's evidence is even less persuasive of his basic thesis: itshows that more-educated workers have higher turnover rates and that theiruse therefore imposes unsuspected costs on employers; unfortunate ly, thisseems to prove, not that educated labour is no more productive than "rawlabour," but that they must be much more productive if employers go onhiring them. The upshot of Berg's book is to cast doubt, not so much on the"economic explanation" of the correlation between earnings and education,

I s A s h e p u t s i t d i p l o m a t i c a ll y : " T h e p r o b l e m i n e s t i m a t in g t h e n a t u r e o f t h e u t i li z a t i o n o f e d u c a t e dm a n p o w e r i n t h e U n i t e d S t a t e s b y t h e ' d i r e c t a p p r o a c h ' a r e , a t t h e v e r y l ea s t, a g o o d d e a l m o r ec o m p l e x t h a n m i g h t b e s u p p o s e d f r o m a r e a d i n g o f t h e e a rl ie r a n d g r o u n d b r e a k i n g s tu d i e s , e v e n a f t e ra l lo w i n g f o r t h e i r c a u t io u s s t i p u l a ti o n s c o n c e r n i n g t h e a d e q u a c y o f t h e d a t a " ( B er g, 1 9 7 0 , p p . 5 8 - 5 9 ) .

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as on the effor t to measure the productiv ity of individual workers in purelyphysical terms.

We turn now to a completely different way of tackling the problem,namely, by interfirm, interindustry and international comparisons. A recentcross-section study by Richard Layard and others (1971) compares the edu-cational structure of a random sample of 68 plants employing 26,000 non-manual workers in the British electrical engineering industry with variousindicators of the economic performance of establishments. The industrialcensus divided the electrical engineering industry into six min imum list head-ings by type of product produced, such as electronic equipment, heavyelectrical goods, wires and cables, etcetera. Within these headings, plants areproducing more or less the same product, which ought to mean that at anypoint in time, they operate with the same capital-labour ratio and with thesame combinations of different types of labour. But of course the plants arenot all of the same age or size and therefore we might expect some to usemore up-to-date equipment than others, which would lead to differences inthe occupational and educational composition of their work force. Andindeed there are wide disparities in the proportions of people with differenteducational qualifications employed by different factories making the sameproducts. Now if education does raise the productivity of people, we mightexpect that education-intensive plants would enjoy either higher profit rates,or larger sales per unit of capital, or faster rates of growth of sales, or higheroutputs per unit of labour, or lower unit costs. But none of these expecta-tions is borne out by the evidence. Differences in the educational and occu-pational structure of the labour force of plants within sub-categories of theelectrical engineering industry in Britain are not statistically related to any o fthe factors ment ioned above, nor even to capit al- labour ratios, or the type ofproductive process employed, or the size and country of origin of the parentfirm.

Likewise, efforts to estimate either Cobb-Douglas or CES productionfunctions for each o f the six minimum list headings, where the labour forceis broken down into four types of labour depending on its level of education(namely, graduates, professionally trained people, H.N.C.'s and O.N.C.'s),yielded statistically insignificant coefficients for educated labour; to put itmore precisely, the estimates could not reject the hypothesis that all thelabour inputs are per fec t substitutes. ~ What is even more surprising is the1 6 T h e s e e s t i m a t e s b y D e n i s S a r g a n a r e t h e f i rs t t o i n t r o d u c e e d u c a t i o n i n t o c r o s s - s e c t i o n m e a s u r e -m e n t s o f p r o d u c t i o n f u n c t i o n s b y d i s ag g r e g at i n g l a b o u r i n t e r m s o f e d u c a t i o n a l a t t a i n m e n t s . P re v i o u se f f o r t s t o d o s o fo r t i m e - s e r ie s d a t a a r e d i f f ic u l t t o i n t e r p r e t f o r o u r p u r p o s e s b e c a u s e t h e y h a v e a l m o s ta l w a y s i n t r o d u c e d e d u c a t i o n a s a p u r e l a b o u r - a u g m e n t i n g i n d e x , t h e w e i g h t s o f w h i c h a r e t h e v e r ye a r n i n g s d if f e r e n ti a l s b y l e ve l s o f e d u c a t i o n t h a t w e w a n t t o e x p l a i n . T h e l i te r a t u r e i n t h i s a r e a i s t o ov a s t t o s u r v e y a d e q u a t e l y i n a f o o t n o t e : F o r s o m e r e f e r e n c e s, s e e G r i l i c h e s ( 1 9 7 0 ) .

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fact tha t the estimates only improved slightly when labour was divided intoonly two types, namely, "H.N.C. and above" and "less than H.N.C."

The almost wholly negative results of the Layard study can be inter-preted in at least five different ways. Firstly, we can deny that output isreally homogeneous in the electrical engineering industry even within mini-mum list headings; in other words, the plants in question were not on thesame production function. This explanation receives some support from thefact that the only statistically significant regressions in the entire study arethose in which the proport ions of educated labour in plants are regressed onfour dummy variables that reflect the product mix of plants. Secondly, wecan d e n y the implicit assumption of the study that all plants at the samepoint in time are optimally adjusted to given factor and product prices: If ittakes time to adjust to changes in product and factor markets, some plantsmight adjust more quickly than others and this would explain why we donot discover any systematic relationships between economic variables acrossplants. Thirdly, we can assert that certain things which are in fact importantto the economic performance of factories, such as the character of theirmanagement, or their pricing policy, or their research-orientation, are notincluded in the regressions and this is why no definite relationships emerge.Fourthly, we can argue, somewhat speciously, that the results show thatmore-educated workers are indeed perfect substitutes for less-educated work-ers; although educated workers make a disproportionate contribution tooutput, this contribut ion is exact ly offset by their higher earnings.~ 7 Lastly,we can give up the fight and admit that the Layard results are evidenceagainst the not ion that finns are efficient in utilising labour: if labour ishired haphazardly, or if hiring is governed by rules-of-thumb which varyfrom finn to finn, or if there is "conspicuous consumption" of educatedworkers because employers derive utility from working with highly educatedemployees, we would get precisely the results produced by the Layard study.In short, we must conclude that our confidence in the "economic explana-tion" is now somewhat shaken.Consider finally an OECD study (1970) which compares entire sectorsof an economy across 52 countries. Here the regression results are not quiteso dramatic. Nevertheless, no definite and unambiguous relationships emergebetween the proportions of labour with dif ferent years of schooling and out-put per head, capital per worker, energy consumption per worker and evencomposite social indicators of living standards. I find it difficult to interpretthese findings because they do no t correspond to any recognisable theory ofthe relationship between economic variables: Economic theory does no t leadone to expect that there is any unique relationship between the educational17 For a formal analysis of this case, see Joh nso n (1970).

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d e n s i t y o f a n e n ti re s e c to r o f a n e c o n o m y a n d o u t p u t p e r w o r k e r o r c a pi ta lp e r w o r k e r i n t h e s e c t o r ( s ee m y c o m m e n t s s e t o u t a t g r e a t e r l e n g th i nO E C D , 1 9 7 0, p p . 2 8 3 - 2 8 6 ) . T h e o n l y w a y t o m a k e s en se o f t h e O E C Dr e g r es s io n i s t o a s s u m e t h a t d i f f e r e n t c o u n t r i e s a re o n t h e s a m e s e c t o r a lp r o d u c t i o n f u n c t io n s , a l th o u g h a t d i f fe r e n t p o i n t s o n th e s e p r o d u c t i o n f u n c-t io n s . A l t h o u g h t h is is a s t a n d a r d a s s u m p t i o n o f m o d e m i n t e r n a t i o n a l t r ad et h e o r y , a t l e a s t f o r t h e t r a d e d g o o d s o f i d e n t i c a l i n d u s t r i e s i f n o t f o r i d e n t i-c al s e c to r s o f d i f f e r e n t c o u n t r i e s , t h e m i n d b o g g l e s a t t h e f a c t o r s t h a t a r et y p i c a l l y e x c l u d e d in p r o d u c t i o n - f u n c t i o n m e a s u r e m e n t s w h i c h a re s u r el y n o ti n v a ri a n t b e t w e e n c o u n t r i e s , s u c h a s n a t u r a l re s o u r c e e n d o w m e n t s , t h e q u a l-i t y o f m a n a g e m e n t a n d t h e w o r k h a b i t o f t h e l a b o u r f o r c e . A t a n y r a t e, th o s ew h o a r e st il l n a i v e e n o u g h t o b e l i e v e t h a t e d u c a t i o n is th e k e y t o e c o n o m i cg r o w t h w i ll f i n d s u f fi c i en t g r o u n d s i n t h e O E C D s t u d y t o t h i n k a ga in .

3 . W h a t D i f f e r e n c e D o e s I t M a k e ?

W e t u r n t o t h e e x p l a n a t i o n o f s o c i o lo g i s ts a n d p s y c h o l o g i s t s . W e h a v et o i n v e n t t h e " s o c i o l o g i ca l e x p l a n a t i o n " o f t h e c o r r e l a ti o n b e t w e e n e d u c a -t i o n a n d e a r n i n g s b e c a u s e s o c i o l o g i s t s h a v e n o t i n f a c t a d d r e s s e d t h e m s e l v e sd i r e c t l y t o t h e p r o b l e m . R e a d i n g b e t w e e n t h e l i n e s , h o w e v e r , t h e a r g u m e n ts e e m s t o f al l i n t o t w o p a r t s , t h e f ir s t o f w h i c h s i m p l y d i s m i s s e s t h e c o r re l a -t i o n a s s p u r i o u s .

I t as s e rt s t h a t t h e c o r r e l a t i o n b e t w e e n n a t i v e a b i l i t y a n d e a r n in g s , o rb e t w e e n a c q u ir e d a b i l i t y a n d e a r n i n g s - t h e f o r m u l a t i o n d e p e n d s o n th e v i ewt a k e n o f t h e n a t u r e v e r s u s n u r t u r e d e b a t e - i s a t l ea s t a s h ig h a s b e t w e e ne d u c a t i o n a n d e ar n in g s. T o p u t i t v e r y b l u n t l y , c l ev e r a n d / o r m i d d l e c la ssc h i ld r e n g e t m o r e s c h o o l in g t h a n s t u p i d a n d / o r w o r k i n g c l as s c h i ld r e n , a n dl a t e r t h e y e a rn m o r e s i m p l y b e c a u s e t h e y h a v e h a d a ll t h e a d v a n t a g e s i n l if e,o f w h i c h m o r e e d u c a t i o n is o n l y o n e a n d n o t e v e n t h e m o s t im p o r t a n t o n e .N o w i t is c l e ar t h a t w h a t w e h a v e h e r e is a s t r a i g h t f o r w a r d e m p i r i c a l q u e s t i o nw h i c h c al ls f o r m u l t i p l e r e g r e s s io n a n a l y s is o f t h e d e t e r m i n a n t s o f p e r s o n a le a rn i n g s. A g r e a t d e a l o f w o r k o f t h is k i n d h a s in f a c t b e e n c a r r ie d o u t i n t h eU n i t e d S t a t e s , a s w e l l a s i n S w e d e n , M e x i c o a n d K e n y a ( f o r a r e v i e w , s e e B l a u g ,1 9 7 0 , p p . 3 2 - 5 4 ) . T h e b r o a d i m p l i c a t i o n o f th e s e s t u d ie s is t o sh o w t h a te d u c a t i o n d o e s ra is e ea rn i ng s , e v e n i f w e h o l d c o n s t a n t f a t h e r 's o c c u p a t i o n ,f a t h e r ' s a n d m o t h e r ' s e d u c a t i o n , I Q o f t h e i nd i v id u a l t a k e n a t a n ea r ly ag ea n d s c h o o l e x a m i n a t i o n s co r es . A f ai r s u m m a r y o f t h e e v i d e n c e t o - d a t e is t os a y t h a t D e n i s o n w a s n o t f a r w r o n g i n T h e S o u r ce s o f E c o n o m i c G r o w t h( 1 9 6 2 , p p . 6 9 - 7 0 ) w h e n h e a t t r i b u t e d t h r e e -f i f t h s o f t h e e ar n in g s d i ff e re n -t ia ls b e t w e e n e l e m e n t a r y a n d h i gh s c h o o l g r a d u a t e s an d b e t w e e n c o l le g e a n dh ig h s c h o o l g r a d u a t e s i n t h e U n i t e d S t a t e s t o t h e p u r e e f f e c t o f e x t r a y e a r s

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o f s c h o o l in g ; t h is A m e r i c a n f i n d i n g s e e m s t o s t a n d u p f a ir ly w e l l e v e n ino t h e r c o u n t r i e s . TM I t w o u l d b e n a iv e t o a s s er t t h a t t h e q u e s t i o n is n o ws e t tl e d a n d t h a t a ll m u s t a g r ee t h a t t h e c o r r e la t io n b e t w e e n e d u c a t i o n a n de a r n in g s c a n n o t b e e x p l a i n e d a w a y i n t e r m s o f s o c ia l c la s s o r ig in s . H o w e v e r ,f o r p r e s e n t p u r p o s e s i t is i n te r e s ti n g t o n o t e t h a t e v e n i f e v e r y o n e a c c e p t e dt h e D e n i s o n f i n d in g , t h e r e is s ti ll s c o p e f o r a " s o c i o l o g i c a l e x p l a n a t i o n " o ft h e e a r n i n g s d i f f e r e n t i a l s t h a t a r e a t t r i b u t a b l e t o e d u c a t i o n .

T h e a r g u m e n t r e s ts o n t h e f a c t t h a t a ll o r g a n i s a t i o n s a r e h i e r a r c h ic a l lym a n a g e d s o t h a t a s w e d e s c e n d f r o m t h e a p e x , t h e n u m b e r o f s u p e ri o rs a n dt h e e x t e n t o f a c c o u n t a b i l i ty t o t h o s e h i g h e r u p in t h e ch a in o f c o m m a n dc o n t i n u a l l y i n cr e as e s, w h i le t h e n u m b e r o f u n d e rl in g s a n d th e d e g re e o fi n d e p e n d e n c e f r o m t h e s u p e r v i s io n o f o t h e r s c o n t i n u a l l y d e c re a se s . 19 T h o s ew h o s t a n d a t t h e t o p o f e a c h la y e r, a n d p a r t ic u l a r ly t h o s e w h o o c c u p yp o s i t io n s i n t h e u p p e r l a y e rs , m u s t h a v e th e p e r s o n a l c o n f i d e n c e t o c o m -m a n d o t h e r s a n d m u s t s h ar e a c o m m o n l o y a l t y t o t h e o r g a n i s a ti o n if t h eo r g a n i s a t i o n is t o s u r v iv e at all. I t i s n o a c c i d e n t t h a t t h e m e m b e r s o f w h a tG a l b r a i t h c al ls " t h e t e c h n o s t r u c t u r e " a r e u s u a l ly h ig h l y e d u c a t e d p e o p l eb e c a u s e a n y o n e w h o h a s c r o s se d t h e su c c es s iv e h u r d l e s o f s e c o n d a r y a n dh i g h e r e d u c a t i o n is l i k e ly t o h a v e a c q u i r e d t h e a p p r o p r i a t e p e r s o n a l i t y t ra i tso f i n d e p e n d e n c e a n d s el f- re li an c e; t h e y h a v e b e c o m e a c c u s t o m e d , a s i tw e r e , t o t h i n k i n g o f t h e m s e l v e s a s m e m b e r s o f a n i n t e l le c t u a l e l it e, a n d t h e ya re n o t l i k e l y t o q u i b b l e a t j o i n i n g a n e l it e w i t h i n a n o r g a n i s a t io n .

T h i s a r g u m e n t l o o k s v e r y p l a u si b le i f w e c o n f i n e o u r a t t e n t i o n t ob u s i n e s s e x e c u t i v e s , g o v e r n m e n t o f f ic i a ls a n d a d m i n i s t r a t o r s o f a ll k i n d s , b u ta t t h is le v el it i s d i f f i c u l t t o d i s ti n g u i sh i t f r o m " t h e e c o n o m i c e x p l a n a t i o n . "E c o n o m i s t s w o u l d s ay t h a t t h es e p e o p l e e ar n m o r e b e ca u s e t h e y a r e m o r ep r o d u c t i v e : T h e y c o n t i n u a l l y h a v e to a s se ss n e w i n f o r m a t i o n a n d t o t a k en o n - r o u t i n e d e c i s io n s , a n d i t is p r e c i s e l y t h e i r e d u c a t i o n t h a t h a s e q u i p p e dt h e m f o r t h e s e t as k s . T h e d i f f i c u l t y is t h a t o f a p p l y i n g t h e " s o c i o l o g i c a le x p l a n a t i o n " a c r o s s- t h e- b o a r d . W h a t w e m u s t e x p l a in i s n o t j u s t w h y u n iv e r-18 It may be worth scotching a frequent misunderstanding of Denison's "three-fifths assumption," orwhat I prefer to call "th e alpha-coefficient": It refers to a propor tion of the difference between twoearnings strearhs, not to a proporti on of absolute earnings. Thus, the common t'mding that schooling assuch contribute s little to educational performance in standardised tests- e.g, the Plowden evidencethat only 26 per cent of t he "exp lain ed" variance in children's performance on a reading comprehen-sion test in British primary schools is due to differences in the quality of schools (Plowden, 1967,p. 33)-is perfectly compatible with a largo alpha-coefficient. Suppose that the Plowden result alsoheld in both lower and upper secondary schools but that performance nevertheless improves aschildren go from Fourth Forms to Sixth Forms. In that case, if sixth form leavers earn more thanfourth form leavers-which they do -m os t o f this difference may be due to additional schooling.19 The crucial concept is what EUiott Jacques (1956) calls the "tim e span of discret ion," namely , thelength of time for which workers are exempt from supervisory review, which he argues ought to bemade the basis of the pay structure of a company. The "sociological explanation" says in effect thatthe "time span of discretion" is already the basis of the pay structure of most organisations.

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s i ty g r a d u a t e s e a rn m o r e t h a n s e c o n d a r y s c h o o l l ea ve rs , b u t w h y s e c o n d a r ys c h o o l l e a v e rs e a r n m o r e t h a n t h o s e w h o le a v e a t 1 5 . M o r e g e n e r a l l y , i nu n d e r d e v e l o p e d c o u n t r i e s w h e r e s o m e c h il d r en d o n o t a t t e n d s c h o o l a t a ll ,a n d o t h e r s s t a r t w o r k i n g a t t h e a g e o f 1 0 , 1 2 , 1 4 , a n d s o o n , w e h a v e t oe x p l a i n w h y p o s i t i v e e a r n in g s d i f f e r e n t i a l s e m e r g e ev e n f o r an a d d i t i o n a ls i x t h , s e v e n t h a n d e i g h t h y e a r o f e d u c a t i o n . 2~ I f g r a d u a t e s e ar n m o r e b e -c a u se t h e y a r e " l e a d e r s o f m e n , " a re w e e x p e c t e d t o b e l i e v e t h a t t h is al soa p p l ie s t o h ig h s c h o o l g r a d u a t e s a n d e v e n t o p r i m a r y s c h o o l l e av e r s?

T h e s e d i f f ic u l t ie s d o n o t e x is t f o r t h e " p s y c h o l o g i c a l e x p l a n a t i o n , "w h i c h is i n d e e d p e r f e c t l y g e n e ra l. A s s u m e o n c e a g a i n th a t o r g a n i s at i o n s a reh i e r a r c h ic a l l y a r r an g e d , 2~ n o t o n l y b e c a u s e o f t h e n a t u r e o f d e c i s i o n - m a k i n gb u t a ls o b e c a u s e o f t h e t e c h n i c a l c h a ra c t er i s t i cs o f t h e p r o d u c t i o n p r o c e ss .T h e s t r u c t u r e o f o c c u p a t i o n s a n d t h e c o r r e s p o n d i n g s t r u c t u r e o f re w a r d s i ni n d u s t r y t a k e s o n t h e sh a p e o f a p y r a m i d ; t h e f u r t h e r u p t h e p y r a m i d w e go , t h eg r e a t e r is t h e d e g r e e o f r e s p o n s i b i l i t y i m p o s e d o n j o b i n c u m b e n t s , a n d t h eg r e a t e r i s t h e d e g r e e o f i n i ti a t iv e r e q u i r e d f r o m t h e m . E m p l o y e r s a r e n o t s u r et h a t t h e y c a n m e a s u r e t h e p a r t i c u l a r b u n d l e o f a t t r i b u t e s r e q u i r e d t o r is e u pt h e p y r a m i d , b u t t h e y h a v e f o u n d f r o m p a s t e x p e r i e n c e t h a t t h e r e is ag e n er a l c o n c o r d a n c e b e t w e e n s u c h ab i li ti es a n d e d u c a t i o n a l a t t a i n m e n t s . I nt h a t s e n se , e d u c a t i o n a l c r e d e n t i a l s a c t a s s u r r o g a t e s f o r q u a l i t ie s w h i c h t h ee m p l o y e r r eg a rd s a s i m p o r t a n t : T h e y p r e d i c t a h i g h e r l ev e l o f p e r f o r m a n c ew i t h o u t n e c es s ar il y m a k i n g a n y d i re c t c o n t r i b u t i o n t o i t . F r o m t h e p o i n t . o fv i e w o f s t u d e n t s , o n t h e o t h e r h a n d , t h is c h a r a c te r i st i c o f e d u c a t i o n a l c re -d e n ti a ls p r o v i d e s a n u r g e t o o b t a i n m o r e e d u c a t i o n a s t h e o n l y w a y o fs e c ur in g a c o m p e t i t i v e a d v a n t a g e i n t h e l a b o u r m a r k e t : A n a d d i t i o n a l p a p e rq u a l i f i c a t i o n a c t s i n e f f e c t as a " u n i o n c a r d " f o r e n t r y i n t o t h e a p e x o f t h eo c c u p a t i o n a l p y r a m i d . 22 T h i s e x p l a n a t i o n n e a t l y a c c o u n t s f o r t h e f a c t t h a t

20 It is note worth y that there is African andAsian evidence that significant earnings differentials onlyoccur once a worker has acquired 4-5 years of schooling; having only a few years of primary educat ionseems to make little difference to earnings prospects.21 The argument that fol lows is a generalisation of the work o f Simon and LydaU (1968, pp. 125 -133), which invokes the hierarchic hypothesis to show that the dist ribut ion of salaries in an organi-

,sation will follow the Pare to Law.22 For a succinct statement of "th e psychologi st's explanation" we have to go to the writings of aneconomist: '~I'o be sure, economic growth is associated with higher education, but which is cause andwhich effect? Who is to say that Enoch Powell is wrong?-higher education might be simply aconsumption good for which rich communit ies develop a taste as much as rich individuals like foreigntravel. The so-called economic yield on higher education might be due to little more than this: Cleverpeople usually get more money than stupid people, but they will also compete for degrees andpre-empt university places once a prejudice in favour of degrees has been established. And such aprejudice might be initially due to nothing more than the convenience to employers of a free externaltesting system: The universities, already existing in adequate numbers, happen to be able to certify, atan absurdly great cost, which are the clever ones. So employers demand degrees, and from there on thewhole expansion might be a vicious circle" (Wiles, 1969, p. 195; see also Nelson, 1967).

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e d u c a t i o n a n d e a r ni n g s a r e p o s i t iv e l y c o r r e l a t e d ; i t e v e n e x p l a in s w h y s om a n y e d u c a t i o n a l q u a l if ic a t io n s a p p e a r t o b e u n r e l a te d t o t h e t y p e o f w o r kt h a t i n d iv i d u a ls t a k e u p a n d w h y t h e r e t u r n s t o t h e t e r m i n a l y e a r o f a c y c l eo f e d u c a t i o n a r e f r e q u e n t l y d i s p r o p o r t i o n a t e l y la rg e r t h a n t h e r e t u r n s t oe a r li e r y e a r s , t h e s o - ca l le d " s h e e p s k i n e f f e c t . "

T h e g e n e r al i m p l i c a t io n s o f t h e " p s y c h o l o g i c a l e x p l a n a t i o n " a r e d e v-a s ta t i n g. S i n ce t h e e c o n o m i c r e t u r n s t o s o c i e t y o n t h is a r g u m e n t a r e m e r e l yt h o s e o f p r o v i d i n g a s c r e e n i n g d e v ic e f o r e m p l o y e r s , a n d s i n ce th e p r o v i si o no f e d u c a t i o n e v e r y w h e r e e n ta i ls c o n s i d e r a b l e s u b si d ie s t o s t u d e n t s , t h e n e tc o n t r i b u t i o n o f e d u c a t i o n t o n a t io n a l o u t p u t m u s t b e n e g at iv e . E d u c a t i o n isn o t a f o r m o f i n v e s t m e n t i n e c o n o m i c g r o w t h a n d t o p r o v id e m o r e e d u c a t i o ns i m p l y i n c re a s e s t h e s c r a m b l e f o r to p j o b s w i t h o u t a d d i n g a n y t h i n g t o p r o -d u c t i v e c a p a c i t y ; in s h o r t , e d u c a t i o n i s a s er vi ce , t h e s u p p l y o f w h i c h a u t o -m a t i c a l ly c r e a t e s i ts o w n d e m a n d b y v i r tu e o f t h e f le x i b il it y o f h i r i n g s ta n -d a r d s f o r j o b s . T o p u t i t s li g h tl y d i f f e r e n t l y , th e f a c t t h a t m o r e - e d u c a t e dp e o p l e e a rn m o r e s i m p l y m e a n s t h a t t h e y " e x p l o i t " t h e l e ss -e d u c a te d : S i nc ee d u c a t e d l a b o u r is p a i d m o r e t h a n i ts m a r gi n al p r o d u c t , " r a w l a b o u r " m u s tbe pa id l ess . 2a

T h e s e c o n c l u s i o n s a r e s u b j e c t t o s o m e p o s s i b l e q u a l i f i c a t io n s . F i r s t ly ,e d u c a t i o n m a y g e n e r a t e p r o d u c t i o n - e x t e r n a l i ti e s s u c h t h a t m o r e e d u c a t i o nf o r s o m e , w h i l e i n n o w a y a d d i n g t o t h e i r o w n m a r g i n a l p r o d u c t , n e v e r -t he le s s, ra is e s t h e p r o d u c t i v i t y o f o t h e r s w h o h a v e n o t e n j o y e d a d d i t io n a le d u c a t i o n . A l t h o u g h w e k n o w v e r y l it tl e a b o u t t h e e x t e r n a l e ff e c t s o f e d u c a -t i o n ( B la u g , 1 9 7 0 , p p . 1 0 5 - 1 1 4 ) , t h e c a s e i n q u e s t i o n is u t t e r l y i m p l a u s i b l eb e c a u s e i t is im p o s s i b l e f o r a n e m p l o y e r t o s e l e c t o n e s e t o f a b i li ti e s o n t h eb a sis o f p a p e r q u a l i fi c a t io n s w i t h o u t e x c l u d i n g a n o t h e r s e t ; i t is h a r d l yl ik e ly , t h e r e f o r e , t h a t l e ss - ed u c a te d p e o p l e w o u l d s o m e h o w b e n e f i t f r o m t h ep r e s e n c e o f m o r e - e d u c a t e d p e o p l e . S e c o n d l y , t h e r e i s s o m e s u gg e sti ve e vi-d e n c e t h a t h i g hl y e d u c a t e d w o r k e r s in t h e U .S . e c o n o m y a c t u a ll y re c ei ve m o r eo n - t h e - j o b a n d i n - p l a n t t r a i n i n g t h a n l e s s - e d u c a t e d w o r k e r s ( M i n c e r , 1 9 6 2 ,p p . 5 9 - 6 1 ) . I f th i s w e r e f o u n d t o b e tr u e e l se w h e r e , i t w o u l d a ll o w u s i ns o m e s e n se t o c o m b i n e t h e " e c o n o m i c " a n d t h e "p s y c h o l o g i c a l e x p la n a -t i o n " : E d u c a t e d l a b o u r i s m o r e p r o d u c t i v e b u t o n l y b e c a u s e e d u c a t i o n in -c r ea s e s t h e l i k e l ih o o d t h a t a w o r k e r w il l b e n e f i t f r o m j o b - re l a t e d i n s t r u c t i o n ;e m p l o y e r s q u i t e r a t i o n a l l y t r e a t e d u c a t i o n a l c r e d e n t ia l s a s a n i n d e x o f t ra i n -a b i li ty , a l t h o u g h f o r m a l e d u c a t i o n a s s u c h h a s n o s i gn i f i c an c e f r o m t h e p o i n t2 3 I t i s c o n c e i v a b le o f c o u r s e t h a t e d u c a t e d l a b o u r " e x p l o i t s " c a p i ta l r a t h e r t h a n r a w l a b o u r . L e s t e rT h u r o w ( 1 9 6 9 , p p . 1 6 3 - 1 6 8 ) p r o d u c e s e v id e n c e , b a s e d o n a ti m e s e r ie s e s t i m a t e o f t h e a g g r eg a t ep r o d u c t i o n f u n c t i o n f o r t h e A m e r i c a n e c o n o m y , th a t t h e ea r n in g s o f t h e av e ra g e A m e r i c a n w o r k e r a r el es s t h a n t h e m a r g i n a l p r o d u c t o f la b o u r ; i n o t h e r w o r d s , it is ca p i ta l t h a t h a s b e e n " e x p l o i t i n g "l a b o u r. B u t t h e s e e s t i m a t e s t h r o w n o l ig h t o n t h e g a p b e t w e e n t h e e a r n in g s a n d m a r g i n al p r o d u c t s o fl a b o u r b y l e v el s o f e d u c a t i o n .

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of view of output . Thirdly, it is conceivable that the main economic impor-tance of schooling is not its direct contribution to the marginal product oflabour but rather its indirect effect on the marginal product of physicalcapital, or bet ter still, on the quality of all inputs in the product ive process.For example, Welch (1970) has shown that much of the impact of addedschooling in U.S. agriculture, at least with respect to college, although notwith respect to high school education, derives from the dynamic character ofchanging technology, that is, from the tendency of better-educated farmersto adopt innovations more readily. Nevertheless, despite evidence of overallslack in certain industries and even in entire sectors of mo dem economics(Leibenstein, 1966; Mack, 1968, pp. 47-54), which emphasizes the impor-tance of managerial inputs, it is questionable that this argument is sufficientlygeneral for the purposes at hand: once again, it must be emphasised that thepositive correlation between education and earnings is not confined only tothose in executive or managerial positions.

We may conclude, therefore, that the "psychological explanation" is infact destructive of the investment view of education: The educational systemis merely an extremely expensive selection mechanism which forces peoplethrough finer and finer sieves without adding anything to them along the way.No doubt, employers need some device for discovering skills and abilities,and no doubt it is economical to certify skills once and for all so as to avoidrepeated testing every time a worker changes jobs. But surely it ought to bepossible to do the job more cheaply by completely divorcing the certifica-tion of skills from formal schooling? Why not certi fy skills once-for-all bymeans of nationally administered tests at the point of first employment,regardless of how the skill was obtained?To pose the question is to see the difficulties. First of all, it would shiftthe cost of certification from general tax funds to employers themselves andemployers would of course resist such a change. But waiving that point, whatevidence do we have that there exists any set of psychological tests that couldcert ify skills and abilities as effectively per unit of costs as an educationalqualification? It is precisely the length of a typical educational cycle leadingup to a final credential that is one of its strengths: Students are examinednot once but repeatedly by a large number of people in the performance of adiverse set of tasks. Fo r all its shortcomings, a degree or diploma may in factprovide a more sensitive test of a person's general abilities than any numberof psychological aptitude and intelligence tests.The "psychological explanation" goes too far: It virtually implies thatability and drive are innate capacities that require no development, onlydiscovery. It ignores the whole area of professional and vocational educationwhich does impart specific skills that cannot be acquired except by formalpreparation. More to the point, it simply ignores the fact that firms often

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p r o m o t e f r o m w i t h i n a n d o n l y h ir e n e w w o r k e r s a t t h e b o t t o m o f t h e ir p a ys ca le s, p a r t l y t o m a i n t a i n m o r a l e a n d p a r t l y b e c a u s e m u c h b e t t e r i n f o r m a -t i o n i s a v a il a bl e o n t h e i r o w n e m p l o y e e s t h a n o n n e w r e c r u i ts t o t h e f ir m .A l t h o u g h v e r y l i tt l e r e l ia b l e i n f o r m a t i o n is a v a i la b l e o n t h i s p o i n t , i t a p p e a r st h a t e d u c a t e d p e o p l e c h a n g e j o b s f iv e o r s ix ti m e s o v e r a l i fe t i m e i n c o n t r a s tt o s o m e t h i r t y o r f o r t y o c c a s i o n s o n w h i c h t h e y r ec e iv e a s al ar y i n c r e m e n tf r o m t h e f ir m in w h i c h t h e y a re c u r r e n t l y e m p l o y e d . W h e n a w o r k e r isi n t e rn a l l y p r o m o t e d , t h e r e is n o r e a so n w h a t e v e r t o r e ly h e a v i l y o n e d u c a -t i o n a l c r e d e n t i a l s a s a n i n d i c a t o r o f h i s s k il ls , a b i l i t ie s a n d v a l u e s , a n d t h i sm a y w e l l e x p l a i n w h y B e rg a n d o t h e r s h a v e fo u n d t h a t m a n y e m p l o y e r s d on o t e v e n b o t h e r p e r m a n e n t l y t o r e c o rd a w o r k e r ' s e d u c a t io n a l a t t a i n-m e n t s ) 4 I n s h o r t, t h e " p s y c h o l o g i c a l e x p l a n a t i o n " is a t b e s t o n l y p a r t o ft h e s t o r y .

4 . C o n c l u s i o nI t i s t i m e t o d r a w t h e t h r e a d s t o g e t h e r . A s w e s u s p e c t e d a ll a l o n g , t h e r e

is a s e n se in w h i c h a ll t h r e e e x p l a n a t i o n s h o l d s i m u l t a n e o u s l y . E m p l o y e r sp a y e d u c a t e d p e o p l e m o r e , e v e n w h e n t h e ir e d u c a t i o n h as t a u g h t t h e m n os p e c if ic sk il l, b e c a u s e t h e y a re m o r e a c h i e v e m e n t - m o t i v a t e d , m o r e s e lf -r e l ia n t , a c t w i t h g r e a t e r in i t ia t i v e i n p r o b l e m - s o l v i n g s i t u a t i o n s , a d a p t t h e m -s e l v e s m o r e e a s i l y t o c h a n g i n g c i r c u m s t a n c e s , a s s u m e s u p e r v i s o r y r e s p o n s i b i l -i ti es m o r e q u i c k l y , a n d b e n e f i t m o r e f r o m w o r k e x p e r i e n c e a n d o n - t h e - jo bt ra in in g . T h e y p a y t h e m m o r e n o t o n l y w h e n t h e y hi re th e m b u t th e y g o o np a y i n g t h e m m o r e t h r o u g h o u t t h e ir w o r k i n g l if e. I n s h o r t, t h e y e x p e c t t h e mt o b e m o r e p r o d u c t i v e t h a n l e s s -e d u c a t ed p e o p l e a n d t h e e x p e c t a t i o n isb o r n e o u t . T h e w e a k n e s s o f t h e " s o c i o l o g i c a l " a n d " p s y c h o l o g i c a l e x p la n a -t i o n " is p r e c is e ly t h a t t h e a d v a n ta g e s o f m o r e - e d u c a t e d p e o p l e s h o w u p a te v e ry a ge t h r o u g h o u t w o r k i n g l if e. N o w w e c a n n o t h a v e it b o t h w a y s : E i t h e rt h e e d u c a t i o n a l s y s t e m is a s u p e r b d i s c r im i n a n t o f t h e s o r t o f a b il it ie s in -d u s t r y d e m a n d s , i n w h i c h c a se w e m u s t c o n c l u d e t h a t t h i s is t h e e c o n o m i cr o le o f e d u c a t i o n u n t i l s u c h a t i m e t h a t a b e t t e r s c r e e n in g d e v i c e is i n v e n t e d ,

24 In a remarkable book that came my way after this paper was comple ted, Doeringer and Piore (1971)distinguish between the "internal labour market" of an enterprise, within which the pricing andallocation of labour is governed by administrative procedures, and the external labour market ofconventional economics. The two are conn ected by certain job categories which mark entry and exitpoints to and f rom the internal system; the remainder of jobs within the internal labour market are filledby the promot ion or transfer of workers who have already gained entry. This is precisely the point of theremarks in the text above. Although their book deals largely with blue-collar workers in manufacturing,their analysis is extremely suggestive for the question of earnings differentials among white-collarworkers. See, in particular, Doeringer and Piore (1971, pp. 3, 47, 7 6- 7, 10 3- 7, 19 4) .

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o r i t i s o n l y a c r u d e w a y o f s el e ct in g p e o p l e t h a t m i s i n f o r m s a s f r e q u e n t l y a si t i n f o r m s , i n w h i c h c a s e i t is n o t c l e a r w h y e m p l o y e r s d o n o t c o r r e c t t h e i ri n it ia l h i r in g m i st a k e s. B u t o f c o u r s e t h a t a s s u m e s t h a t e m p l o y e r s a re c o n -t i n u a l ly t i g h t e n i n g u p t h e a l l o c a ti o n o f l a b o u r , w h i c h t h e y w o u l d o n l y d o i ft h e y w e r e s u b j e c t t o c o m p e t i t i v e p r e s su r e s. W e c o m e b a c k f u ll c ir c le , t h e r e -f o re , t o t h e q u e s t i o n o f c o m p e t i t i o n i n l a b o u r m a r k e t s . It is t h e a c t i o n o fc o m p e t i t i o n i n a l a b o u r m a r k e t t h a t a l l o w s all t h r e e e x p l a n a t i o n s to h o l ds i m u l t a n e o u s l y . C o n t r a r i w i s e , t h e l e s s a r e t h e p r e s s u r e s t o c o m p e t e , t h ew e a k e r is t h e " e c o n o m i c e x p l a n a t i o n " a n d t h e s tr o n g e r a re th o s e o f th es o c i o l o g i s t a n d p s y c h o l o g i s t . T h u s , t h e m u c h - p u b l i c i s e d i d e a t h a t e d u c a t i o nc o n t r i b u te s d i r e c tl y t o e c o n o m i c g r o w t h b y t h e f o r m a t i o n o f " h u m a n c ap i-t a l , " r a t h e r t h a n i n d i r e c t l y b y c h a n g i n g b a s i c v a l u e s a n d a t t i t u d e s , r e s t su l t i m a t e l y o n t h e b e l i e f t h a t c o m p e t i t i o n is a t w o r k in l a b o u r m a r k e t s ;w i t h o u t t h a t , t h e r e is o n l y p r e s u m p t i o n , n o t p r o o f ? s

LA SIGNIFICATION DE LA CORR ELA TION ENT RE L 'EDUCATIONET LE RE VENU

Rdsum~

C e t t e 6 t u d e e x a m i n e t r o i s e x p l i c a t io n s po s si bl es d ' u n f a i t f o n d a m e n t a l :d a n s la t r e n t a i n e d e p a y s s u r l e s q u e l s a p o r t 6 l ' in v e s t i g a t i o n , l e n i v e a ud ' 6 d u c a t i o n e s t e n r e l a t i o n 6 t r o i t e a v e c l e s a la i re d e s i n d i v i d u s . ( 1 ) L ' e x p l i -c a t i o n " 6 c o n o m i q u e " r e v i e n t / l d i re q u e l es i n d iv i d u s /l f o r t n iv e a u d ' i n s t r u c t i o ng a g n e n t d a v a n t a g e p a r c e q u e l '~ d u c a t i o n p r o c u r e le s c o m p 6 t e n c e s t e c h n i q u e sq u i s o n t a u j o u r d ' h u i le s p l u s r ar e s. ( 2 ) L ' e x p l i c a t i o n " s o c i o l o g i q u e " e x p l i q u e l em ~ m e p h 6 n o m 6 n e p a r l e fa i t q u e la l o n g u e u r d e l a s c o la r it 6 e s t e l l e -m 6 m ef o n c t i o n d e l 'o r i g i n e d e c la ss e, o u p a r l e f a it q u e l ' 6 d u c a t i o n d i f f u s e l esva l e u r s s o c i a l e s l e s p l u s v a l o r i s 6es pa r l '61 it e d i r i g ea n t e de la s oc i 6 t 6 . ( 3 )L ' e x p l i c a t i o n " p s y c h o l o g i q u e " a f f i r m e q u e l ' 6 d u c a t i o n n e f a i t q u e s61ec-t i o n n e r l es i n d i v i d u s s e l o n l eu r s a p t i t u d e s i n n 6 es , e n s o r t e q u e l es p l u sc a p a b l e s g a g n e n t p l u s q u e c e u x q u i l e s o n t m o i n s .

O n s e d e m a n d e s i c e s e x p l i c a t i o n s s o n t v r a i m e n t c o n t r a d i c t o i r e s . O nm o n t r e q u ' u n e a p p r e c i a ti o n a d 6 q u a t e d e l ' ex p l ic a t io n 6 c o n o m i q u e i m p l iq u el es d e u x a u t r e s. S u r u n m a r c h 6 d e t r a v ai l, o ff j o u e r a i t u n e c o n c u r r e n c e p u r e ,2 s I t i s i r o n i c t h a t E n o c h P o w e l l , w h o e l s e w h e r e d i s p l a y s g r e a t f a i t h i n t h e e ff i c a c y o f t h e m a r k e tm e c h a n i s m , d e n ie s t h a t h i g h e r e d u c a t i o n c o n t r i b u t e s t o g r o w t h : " t h e g r o w t h t h e o r y o f e d u c a t i o n i sb u n k u m . . , e c o n o m i c g r o w t h i s n o m o r e c a u s e d b y t h e i n c r ea s e o f e d u c a t i o n t h a n b y th e p r e v al e n ceo f le i s ur e o r o f m o t o r c a r s " ( P o w e U , 1 9 6 8 ) . T h i s d e n ia l , w e n o w s e e , a m o u n t s t o t h e r e p u d i a t i o n o ft h e m o d e l o f p e r f e c t c o m p e t i t i o n a p p l i ed t o l a b o u r m a r k e t s . B u t i n t h a t c as e, w h a t b e c o m e s o f t h ef a i th i n f r e e m a r k e t s ?

7 4


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l es s al ai re s i n d i q u e r a i e n t n 6 c e s s a i r e m e n t la r a re t 6 r e l at iv e d e s " c o m p 6 t e n c e st e c h n i q u e s q u i s o n t p r o f e s s i o n n e l l e m e n t u t i l e s " ; d ' a u t r e p a r t l a c o m p 6 t e n c ep r o f e s s i o n e l l e d e v r a i t c o m p r e n d r e l a p o s s e s s i o n d e s v a l e u r s e t d e s m o t i v a -t i o n s q u i c o n v i e n n e n t a u m i l i e u i n d u s t r i e l . M a i s , e n l ' a b s e n c e d ' u n e c o n c u r -r e n c e p r e s s a n t e , i l p e u t s e f a i re q u e l e s s a la i re s s e f o n d e n t s u r d e s e s t i m a t i o n sp u r e m e n t c o n v e n t i o n n e l l e s . E n d 6 f i n it iv e , l a f o r c e d e l a c o n c u r r e n c e s u r l em a r c h 6 d u t ra v a il e s t l e p i v o t d e l a q u e s t i o n . L a q u e s t i o n d e s a v o i r s il ' ~ d u c a t i o n c o n t r i b u e h l ' e x p a n s i o n 6 c o n o m i q u e r e n v o i e -t - el l e a u s si /l l ap r 6 s e n c e o u fi l ' a b s e n c e d e r i v al it 6 s u r l e s m a r c h 6 s d u t ra v a il .

O n p r o c 6 d e fi u n e a n a l y s e d e la l o g i q u e i n t e r n e d e s t ro i s e x p l i c a ti o n s .O n e x a m i n e a u ss i le s q u e l q u e s d o n n 6 e s d i s p o n i b l e s q u i p o u r r a i e n t p r o u v e r lal i ai s o n e n t r e l ? ~ d u c a t i o n e t l a p r o d u c t i v i t 6 d e s o u v r i e r s . O n e s s ai e d e r e-n o u v e l e r c e s q u e s t i o n s e n m e t t a n t e n r a p p o r t s l e d 6 b a t d e l ' 6 d u c a t i o n e t d e lac r o i s s a n c e a v e c l es q u e s t i o n s d 6 b a t t u e s d a n s le d o m a i n e d e la p l a n i f i c a t i o n d el ' e n s e i g n e m e n t .

Re f e r e n c e sA r r o w , K . J . a n d C a p r o n , W . M. ( 1 9 5 9 ) . " D y n a m i c Sh o r t a g e s a n d P r ic e R i s e s: T h e E n g i n e e r - Sc i e n t is t

C a s e , " Q. J . Econ. (May) .Berg , I . (1970) . Educa t ion and Jobs : The Great Tra in ing Ro bbery . New Y ork : Praeger .Blaug , M. (1970) . A n I n t r o d u c t i o n t o t h e Ec o n o m i c s o f Ed u c a t io n . L o n d o n : A l l e n L a n e t h e Pengu in

Press.Blaug , M. , Laya rd , R . and WoodhaU, M . (1969) . Causes o f Graduate U nem plo ym en t in Ind ia . L o n d o n :Al le n Lane th e Peng u in Press .B l a u g , M. , Pe s t o n , M. a n d Z i d e r m a n , A . ( 1 9 6 7 ) . T h e U t i li z at io n o f Ed u c a t e d M a n p o w e r i n I n d u s t r y .L o n d o n : O l i v e r & B o y d .Bur ton , J . F . J r . , et al. (1971) . Read ings in Labor Marke t Ana lys i s . N e w Y o r k : H o l t , R i n e h a r t a n dWins ton .C r o s sl e y, J . R . ( 1 9 7 0 ) . " T h e o r y a n d M e t h o d s o f N

the correlations between education and earnings

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