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The Different Returns to Cognitive Ability in the Labor and Capital Markets

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Abstract

We investigate the returns to cognitive ability in the labor and capital markets. Using population-wide Swedish military enlistment data and administrative tax records, we find that cognitive ability is much better at predicting capital income than labor earnings. The difference is almost a factor of three and remains substantial even after controlling for education, occupation, savings, inheritance, and parental background. Moreover, ability is significantly positively correlated with wealth returns. Our results provide new insights into why inequality in capital income is greater than in labor income and shed light on the drivers of economic mobility.

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  • Bastani, Spencer & Karlsson, Kristina & Waldenström, Daniel, 2023. "The Different Returns to Cognitive Ability in the Labor and Capital Markets," Working Paper Series 1459, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1459
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    More about this item

    Keywords

    Ability; Skills; Education; Capital income; Wealth;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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