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

79 Pages Posted: 22 Sep 2021 Last revised: 4 Feb 2022

See all articles by Santiago Hermo

Santiago Hermo

Brown University

Miika Päällysaho

Stockholm University - Department of Economics

David Seim

Stockholm University; Centre for Economic Policy Research (CEPR)

Jesse M. Shapiro

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2021

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.

Keywords: Administrative data, Flynn effect, Human Capital, IQ, Skill investment

JEL Classification: J24, J31, O52

Suggested Citation

Hermo, Santiago and Päällysaho, Miika and Seim, David and Shapiro, Jesse M., Labor Market Returns and the Evolution of Cognitive Skills: Theory and Evidence (August 2021). CEPR Discussion Paper No. DP16422, Available at SSRN: https://ssrn.com/abstract=3928701

Santiago Hermo (Contact Author)

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Miika Päällysaho

Stockholm University - Department of Economics ( email )

Stockholms universitet
Stockholm, 106 91
Sweden

David Seim

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jesse M. Shapiro

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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