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Adult literacy and economic growth - WP 04/24

3  An introduction to the economic effects of increased literacy

The key factors in any link between literacy skills and economic performance are participation in paid work and workplace productivity. The argument is as follows. Firstly, people with better literacy skills are more likely to be in the workforce. Secondly, workers with greater literacy skills can do their jobs more effectively, or need less supervision or direction, are better able to adapt to new technologies, are likely to make fewer mistakes at work and work better in teams, are less likely to have workplace accidents, are less likely to be absent from work, probably have better morale, and so on. There are a number of different ways of proving (or trying to prove) this argument.

3.1  Country-level studies

If people with better literacy skills are more productive, and these benefits outweigh the costs of literacy training, then an increase in literacy will raise the level of output of the country, that is, it will raise GDP per capita. We can test for this effect directly, by comparing the level of, or growth in, GDP per capita amongst countries with different levels of literacy in their population, taking account of other relevant differences between countries. These sorts of macro-economic cross-country growth regressions are discussed in Chapter 4. This Chapter finds that there is little cross-country evidence to suggest that increased literacy at an aggregate level goes hand-in-hand with increased growth.

3.2  Individual-level studies

Productivity increases can also be measured at the individual level. Studies look at whether people with better literacy skills are more likely to be employed than people with poorer literacy skills. Also, if workers with better literacy skills are paid more, on average, then this suggests they are more productive in their jobs. The studies reviewed in Chapter 5 show that this is the case: people with better literacy skills are more likely to be employed, and to earn more, than people with poorer literacy skills, even when taking account of other factors which affect work performance. Differences between people in terms of literacy – however these differences come about – do matter for productivity.

The studies reviewed in Chapter 5, however, do not show how easy or how difficult it might be to improve people’s literacy skills and how much this would cost. The benefits of better literacy, in terms of productivity, need to be weighed up against the costs of literacy training. These costs include the direct costs to individuals, firms and the government (employing teachers, providing materials, hiring facilities, etc) as well as the opportunity cost of foregone labour or foregone leisure time. Literacy training will also have a particular success rate, in terms of the proportion of students who complete courses and who end up with improved literacy skills as a result. This success rate also needs to be taken into account. So, for example, a relatively inexpensive programme with a high success rate, and which markedly improves literacy, might be a good investment because the benefits outweigh the costs; an expensive programme, from which only a few people come out with slightly improved literacy, might not be. Chapter 6 therefore looks at research evidence on the impact of literacy programmes.

The impact of literacy programmes can be considered in two ways. Firstly, there is a question of how effective literacy programmes are in improving people’s literacy. If programmes are effective in raising literacy then we can plausibly assume, given the results of Chapter 5, that they will also increase people’s employment and their earnings. Labour market outcomes can be measured directly, though, and Chapter 6 also looks at whether, and by how much, literacy programmes increase people’s employment chances and earnings. Chapter 6 shows that there have been very few rigorous studies which look at the impact of literacy programmes. Amongst those which have been conducted, there is some evidence that literacy programmes have an impact on earnings but little evidence that they have an impact on measured literacy skills.

Suppose that a literacy programme is shown to improve the employment prospects or earnings of participants. Would this be evidence of a positive effect on GDP? It would certainly suggest this, but some caution is still required. A small-scale programme may not have the same effects when it is rolled-out to a much larger population. Perhaps more importantly, programmes might have other, less-beneficial, effects on ‘innocent bystanders’, that is, people who do not participate in the programme but whose employment or earnings are affected by those people who do. These are frequently described as ‘displacement effects’ in the literature on labour market programmes (see, for example, Solow 1998; Heckman, Lalonde and Smith 1999a, ch.9; and Heckman, Lochner and Taber 1999b). In some circumstances, for example, the jobs gained by programme participants may be at the expense of other workers, at least in the short term. While it is very difficult to estimate these effects, they should at least be borne in mind when considering whether a programme would have benefits to the country as a whole.

3.3  Firm-level studies

The discussion above refers only to the benefits of literacy which accrue to individuals. This might underestimate the productivity benefits of increased literacy because some of the benefits of productivity gains might accrue to firms (or, more accurately, to the owners of firms) rather than just to their employees. A 10% increase in worker productivity, for example, might be rewarded by a 5% wage increase, with the rest of the benefit accruing to the firm, or to their customers.

Studies have looked at whether firms with more skilled employees are more productive or more profitable than firms with less skilled employees. The National Skills Task Force (2000), for example, refers to a number of studies comparing matched samples of manufacturing firms in different countries, where differences in productivity are related to differences in skills. These studies focus on intermediate and higher level skills, however, rather than literacy skills. There do not appear to be any studies which compare firms according to their levels of basic literacy skills. Some studies have also looked at the effects of particular training programmes on firm productivity, as is described, for example, in Ananiadou, Jenkins and Wolf (2003), Dearden, Reed and Van Reenan (2000) and the Office of Training and Further Education (1998). Some of the training included in these studies may be literacy-related. However, data sets typically do not distinguish between types of training, and so do not allow for differential analyses of literacy-related as opposed to other types of training.

Since there are no rigorous quantitative studies of the benefits of literacy training to firms, the following chapters make no further reference to firm-level evidence. The findings of qualitative studies are often used, however, to suggest some of the benefits of literacy training. A common finding, for example, is that firms which have introduced literacy programmes in their workplaces report benefits from these programmes. Workbase (2002), for example, presents four New Zealand case studies of workplaces which have introduced literacy programmes for their employees. These firms report a number of benefits including a decrease in error rates, improved levels of participation in team meetings, growth in employees’ confidence, and an improved ability to work more flexibly. A review of the initial achievements of the Workplace Literacy Fund reports similar benefits (Skill New Zealand 2002). Bloom, Burrows, Lafleur and Squires (1997b) survey 41 Canadian firms which offered literacy training to their employees. Twenty-one of these companies provided qualitative feedback on the benefits of literacy training to their organisations, which included better team performance, improved labour-management relations, a reduced error rate and increased output of products and services. Similarly, respondents in a survey of 30 Australian firms (Pearson 1996) report many benefits, including productivity benefits, from workplace literacy training. In particular, 70% of the managers and supervisors interviewed consider that their workplaces had made perceptible cost savings which were directly linked to language and literacy training at work.

In other surveys, firms identify the costs they face as a result of the poor literacy skills they perceive amongst their employees (whether or not these are being addressed). In a much-cited study, the Adult Literacy and Basic Skills Unit (1993) asked employers in the United Kingdom to identify these costs. The ALBSU estimated that poor literacy skills cost each company employing more than 50 employees an average of £165,000 every year in poor quality control, lost orders and poor communication. Grossing this up to a national level, the report estimated that poor literacy skills cost UK industry more than £4.8 billion a year. More recently, the ALBSU (now renamed the Basic Skills Unit) estimated that poor literacy skills cost the Welsh economy, which is considerably smaller than the New Zealand economy, more than £558 million a year (Basic Skills Agency and Affairs 2002).

Knowing that firms can identify literacy-related problems, and that those which have sponsored literacy programmes for their workers have been content with the experience, are by no means trivial findings. However, it would be unwise to treat these as proof of the benefits of literacy training and their results are not generalisable to all other firms. For example, only 15% of firms surveyed in the ALBSU study could provide an estimate of the costs of poor literacy skills. Robinson (1997) is very critical of some of this research and says that the £4.8 billion estimate made by the ALBSU is “one of the least reliable figures in the whole debate” (p.24).

3.4  Analyses of trends in skill requirements

Basic literacy skills are required in almost all occupations (Chapter 1). In addition, it is often claimed that literacy skills have been increasingly required in the workplace and that this trend is likely to continue in the future. If this is the case it suggests that improvements in literacy are necessary for a thriving modern economy in the future.

There are two aspects to skill changes over time: changes in the occupational structure of the workforce, and changes in the skills required for particular occupations. Regarding the first of these aspects, studies tend to find that the proportion of the workforce employed in manual occupations has been decreasing and the proportion working in more highly-skilled occupations has been increasing. In New Zealand, the Department of Labour (2003) examines the growth in occupational groupings between the 1991 Census and the 2001 Census. The occupational groupings which had the lowest growth tended to be those which, according to IALS, contain the highest concentrations of workers with Level 1 literacy skills (section 2.4). Between 1991 and 2001, for example, agriculture and fisheries workers, craft and trades workers, and workers in elementary occupations, declined as a proportion of the workforce. Professionals and managers, on the other hand, increased as a proportion of the workforce. These trends should not be overstated, however, and there will still be a demand in the future for lower-skilled occupations. In fact, some of the fastest growing individual occupations between 1991 and 2001 were sales assistants, caregivers, couriers and cleaners.

The other aspect of skill changes is the trends in skill requirements within particular jobs. A common view is that new technology and international competition have forced workplaces to change, and to introduce features such as computerised processes, team-based organisation, an emphasis on problem solving at all levels, and compliance with international quality standards. These changes are believed to have increased the demand for literacy skills in the workplace. While these assertions are quite plausible, little evidence exists to demonstrate them. Some research looks directly at skill changes within particular jobs, as discussed by the National Skills Task Force (2000), but none of this research relates to literacy skills in particular. Using Canadian IALS data, both Boothby (1999) and Krahn and Lowe (1998) examine the literacy tasks which people undertake in various occupational groupings, but IALS data does allow for an examination of individual occupations and does not show changes over time. The following chapters make no further reference to analyses of trends in skill requirements.

3.5  The following chapters

For the purposes of determining whether improved literacy would be good for economic performance, the best studies which have been conducted are cross-country growth studies, studies of individual returns to literacy skills, and evaluations of specific literacy programmes. These three types of studies are discussed in detail in Chapters 4, 5 and 6 respectively.

Of these, the strongest evidence comes from studies of individual returns to literacy skills. Studies consistently find that people with better literacy skills are more likely to be employed, and to earn more, than people with poorer literacy skills, even when taking account of other factors which affect work performance. However, while there is good evidence for the benefits of literacy (Chapter 5) there is little evidence for the benefits of literacy training (Chapter 6) and it is unclear how effectively, and how cost-effectively, literacy can be raised amongst the adult population.

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