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

Author:

Hermo Santiago1,Päällysaho Miika2,Seim David3,Shapiro Jesse M4

Affiliation:

1. Brown University , United States

2. Stockholm University , Sweden

3. Stockholm University and Uppsala University, Sweden, and Centre for Economic Policy Research , United Kingdom

4. Harvard University and National Bureau of Economic Research , United States

Abstract

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% 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.

Funder

Jan Wallander and Tom Hedelius Foundation

Swedish Research Council

University of Gothenburg

Publisher

Oxford University Press (OUP)

Subject

Economics and Econometrics

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