Effective skill: a new theoretical perspective on the relation between skills, skill use, mismatches, and wages

Skills and skill mismatches affect workers’ productivity. However, current approaches to measuring this problem fail to specify the underlying mechanism. In this paper, we develop a new perspective by integrating skill proficiency and skill use into a new concept called ‘effective skill’. Effective skill is defined as a multiplicative function of skill proficiency and skill use. The intuitive understanding of this concept is that a skill can have no effect on productivity if it is not used and, vice versa, the effect of using skills is moderated by the skill proficiency level. We develop a skill matching model using data from the OECD PIAAC Survey. We show that there is no effect of numeracy on wages, other than through the use of numeracy skills. Moreover, we show that a skill mismatch model based on this concept is superior to alternative skill mismatch models in explaining wage differences.