Ability-Heterogeneous Wage Returns
RCTReview
Formal employers in urban developing economies frequently rely on baseline cognitive test scores or academic transcripts to screen job applicants, screening out lower-scoring job seekers [22-24]. Understanding how returns to short-term work experience vary across baseline ability levels determines whether employment exposure serves as a complement or substitute for academic test scores [22, 24, 25].
Picture this
Imagine a nightclub with a strict dress code based on exam scores where high scorers enter easily without extra effort. For high-scoring individuals, additional work experience adds little value because employers already hire them based on test scores. But for low-scoring individuals who are normally stopped at the door, gaining verified work experience provides the missing entry ticket needed to prove their capability to prospective employers.
What the evidence says
Treatment effects are significantly concentrated among lower-ability workers (interaction coefficient = -0.171, p < 0.05 for employment proportion; -0.568, p < 0.05 for log daily wages) [28, 29]. Job seekers at the 25th ability percentile experience a 25 percentage point employment increase and an $11.01 daily wage increase, compared to a 1.5 percentage point employment decline and $2.20 wage increase for those at the 75th percentile [30].
- Who was studied
- N = 227 urban male youth job seekers stratified across cognitive literacy and numeracy ability quintiles in Lilongwe, Malawi [6-8, 26].
- How
- Stratified Instrumental Variable (IV) interaction model evaluating the interaction between baseline test scores and experimentally assigned job offers on 8-month post-intervention employment and daily wages [10, 27, 28].
What to do
Target active labor market experience interventions toward job applicants with lower formal test scores to overcome initial employer screening barriers.
From the source
"Individuals at the 25th percentile were 25 percentage points more likely to be employed if they were induced to receive job experience through the experiment; they also earn approximately $11.01 more per day." [30]
b23e842f-67cd-47d7-9b15-b6b6c8e557a2-Employment Exposure- Employment and Wage Effects in Urban Malawi.pdf