The returns to education and labor market sorting in Slovenia, 1993-2007

Research on the labor market returns to education focus on explanations based on human capital, signaling, and closure. Drawing on the case of Slovenia from 1993 through 2007 - as it transitioned from a planned to a market-based economy - we propose an alternative institutionally coordinated perspective. We delineate the key features of this arrangement, which include: (1) strong educational criteria for occupations; (2) pre-set job-level pay; (3) within-job educational premia (pay sub-classes) in some sectors; and (4) a portion of pay that is performance-based. This institutionally coordinated perspective helps us understand both the role education plays in matching Slovenians to jobs, and how education contributes to differential pay between individuals in the same job. We use matched employer-employee data on all Slovenians to examine the degree to which the returns to education result from sorting into different establishments, occupations, and occupation-establishment units. We find that sorting processes account for the majority of the returns to education under this institutionally coordinated arrangement. Further, the degree to which sorting matters varies by education type, with the returns to vocational education being somewhat less driven by sorting processes.