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Labor Market Returns and the Evolution of Cognitive Skills: Theory and Evidence

Author

Listed:
  • Hermo, Santiago

    (Brown University)

  • Päällysaho, Miika

    (Dept. of Economics, Stockholm University)

  • Seim, David

    (Dept. of Economics, Stockholm University)

  • Shapiro, Jesse

    (Harvard University)

Abstract

A large literature in cognitive science studies the puzzling “Flynn effect” of rising fluid intelligence (reasoning skill) in rich countries. We develop an economic model in which a cohort’s mix of skills is determined by different skills’ relative returns in the labor market and by the technology for producing skills. We estimate the model using administrative data from Sweden. Combining data from exams taken at military enlistment with earnings records from the tax register, we document an increase in the relative labor market return to logical reasoning skill as compared to vocabulary knowledge. The estimated model implies that changes in labor market returns explain 37 percent of the measured increase in reasoning skill, and can also explain the decline in knowledge. An original survey of parents, an analysis of trends in school curricula, and an analysis of occupational characteristics show evidence of increasing emphasis on reasoning as compared to knowledge.

Suggested Citation

  • Hermo, Santiago & Päällysaho, Miika & Seim, David & Shapiro, Jesse, 2021. "Labor Market Returns and the Evolution of Cognitive Skills: Theory and Evidence," Research Papers in Economics 2021:2, Stockholm University, Department of Economics, revised 20 Jan 2022.
    • Handle: RePEc:hhs:sunrpe:2021_0002
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    Cited by:

    1. Weller, Jürgen, 2022. "Tendencias mundiales, pandemia de COVID-19 y desafíos de la inclusión laboral en América Latina y el Caribe," Documentos de Proyectos 48610, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Germ'an Reyes, 2023. "Cognitive Endurance, Talent Selection, and the Labor Market Returns to Human Capital," Papers 2301.02575, arXiv.org.

    More about this item

    Keywords

    Flynn effect; IQ; skill investment; human capital; administrative data;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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