Page 36 - IDEA Study 3 2018 Low skilled

education as middle-skilled even though they may have lost their skills outside of the labor market or their skills may be obsolete. So far, we have used the standard and widely used definition of the low-skilled as those with at most lower-secondary education, i.e. ISCED 2011 categories 0-2. While this is a reasonable definition, easy to implement, comparable across countries and widespread in both economic research and policy analysis, it captures only one rather limited dimension of skills: skills acquired in formal education. Ideally, skills should be measured directly based on particular, well-defined tests of various multidimensional types of skills important for one’s productivity. Although cross-country comparable data are being collected (such as PIACC), the samples are too small and wider implementation would be prohibitively costly. The main criticism of the definition of the low-skilled based on ISCED education levels is that the amount of skills at the end of formal education is likely to change over time, i.e. either increase or decrease (Cedefop 2017). On one hand, the definition does not capture any skills acquired outside of school, e.g. through on-the-job-training, accumulated work experience, or requalification courses (which do not, however, alter the achieved level of education as defined by ISCED). On the other hand, the definition does not capture the fact that the skills of individuals with a higher level of formal education than ISCED category 2 may become obsolete over time or depreciate, in particular, for those who have been out of the labor force for substantial periods since the end of schooling. As a consequence, the ISCED definition may either overestimate the share of the low-skilled (in the first case) or underestimate it (in the second case). We consider an alternative definition of low-skilled individuals as those with low productivity. Specifically, we define “the low-paid“ as those earning a gross monthly wage of CZK 12,970 (the 10th percentile of the wage distribution) or less. As the standard definition of the low-skilled based on formal education may not correctly reflect the current level of skills, we use wage as a proxy for the productivity of those employed, and therefore for their current skill level. Under the assumption of a reasonably competitive labor market, the wage should reflect an individual’s marginal productivity. Even under labor market monopsony, the ranking of individuals by productivity and skills should broadly correspond to their ranking by wage level. The main drawback of this approach is that wages are observable only for those employed. While potential earnings could be imputed for non-working individuals, this approach is often limited by data availability. As information on wages is not available in the VSPS data, we cannot apply 34