Cognitive Skills, Non-Cognitive Skills and Labor Market Returns in Southeast Asia: A Comparison between Employees and the Self-Employed

• In Event: Economic and Finance aspects of Education

Proposal

Conventional labor market models have demonstrated the statistical significance of various aspects of human capital, including cognitive abilities acquired through education and training, in predicting earnings and occupational success. However, these models have focused on wage earners, i.e. employees, and have tended to ignore the self-employed, who make up a large share of the labor force in the informal economy in developing countries. Moreover, even the analyses carried out for employees do not account for a substantial proportion of income level discrepancies.
More recently, social scientists have started to argue that personal traits or non-cognitive skills are also important for determining productivity (and hence earnings), especially in developing countries, where the predominance of the informal economy requires prompt reasoning, judging, imagining, problem-solving and communications skills. This argument is supported by Heckman and Rubinstein (2001), who stressed the critical importance of non-cognitive skills, especially among those with less education. Laajaj & Macours (2019) also discovered that non-cognitive skills might play a more decisive role than cognitive skills in shaping labor market outcomes in low- and middle-income countries. Variances in cognitive and non-cognitive skills are also closely associated with one of the key occupational choices in developing countries, whether to become a salaried worker or to be a self-employed entrepreneur, as well as with earnings performance in the labor market (Groves, 2005). For instance, risk-averse individuals tend to prefer more stable career paths such as permanent employment. On the other hand, those who are more accepting of risk are likely to embrace new challenges or venture into self-employment (Dustmann et al., 2023; Falk et al., 2018). Such attitudes significantly manifest in varying job characteristics, such as salaried employment and entrepreneurship, particularly in the rural areas of developing countries where a sizable portion of the economy is informal. Correspondingly, varying non-cognitive skills also mirror these distinct job characteristics.
Despite rapid economic growth, the emerging economies of Thailand and Vietnam continue to have extensive informal economies which pose challenges to sustainable economic development. The informal economy calls for a distinct set of cognitive and non-cognitive skills compared to its formal counterpart. Therefore, it is crucial to understand individual labor market preferences and the elements driving productivity in countries with significant informal economies. Despite recent growth and increases in overall household wealth, Thailand and Vietnam are still struggling with persistent poverty in rural areas (Hardeweg et al., 2013).
Against this backdrop, we shed light on the relationship between cognitive and non-cognitive skills and between paid workers and self-employed entrepreneurs using data from the Thailand and Vietnam Socio Economic Panel (TVSEP) in 2017. To date, Thai data were collected in the provinces of Buriram, Nakhon Panom and Ubon Ratchathani, and Vietnamese data were collected in the provinces of Thua Thien Hue, Ha Tinh and Dak Lak, all provinces selected to capture household living conditions in rural Southeast Asia. The survey covers approximately 4,000 households in 440 villages. The household sample in each province was randomly drawn based on a stratification process that took account of the different agricultural and ecological conditions within the regions. It is representative of the rural population at the household level.
We utilize the most commonly used indicators of non-cognitive skills known as the “Big Five” personality traits (openness to experience, conscientiousness, extraversion, agreeableness and neuroticism). We analyze the returns to both cognitive skills (different education levels), focusing particularly on upper secondary general and vocational education, and to non-cognitive skills, in both cases comparing both paid workers and entrepreneurs. Methodologically, we examine nonrandom selection into workers and entrepreneurs, as well as nonrandom selection (participation) in school-based vocational education, using ordinary least squares and propensity score matching methods. Without an understanding of what is driving productivity and occupational selection, it is not possible to challenge existing policies, a key part of informed political protest.

References:
Dustmann, C., Fasani, F., Meng, X., & Minale, L. (2023). Risk Attitudes and Household Migration Decisions. Journal of Human Resources, 58(1), 112–145. https://doi.org/10.3368/jhr.58.3.1019-10513R1
Falk, A., Becker, A., Dohmen, T., Enke, B., Huffman, D., & Sunde, U. (2018). Global evidence on economic preferences. Quarterly Journal of Economics, 133(4), 1645–1692. https://doi.org/10.1093/qje/qjy013
Groves, M. O. (2005). How important is your personality? Labor market returns to personality for women in the US and UK. Journal of Economic Psychology, 26(6), 827–841. https://doi.org/10.1016/j.joep.2005.03.001
Hardeweg, B., Klasen, S., & Waibel, H. (2013). Establishing a Database for Vulnerability Assessment. In S. Klasen & H. Waibel (Eds.), Vulnerability to Poverty (pp. 50–79). Palgrave Macmillan.
Heckman, J. J., & Rubinstein, Y. (2001). The Importance of Noncognitive Skills: Lessons from the GED Testing Program. American Economic Association, 91(2), 145–149. https://www.jstor.org/stable/2677749
Laajaj, R., & Macours, K. (2019). Measuring Skills in Developing Countries. Journal of Human Resources, 56(4), 1–46. https://doi.org/10.3368/jhr.56.4.1018-9805R1

Author

• Seonkyung CHOI, Hiroshima University