Scandinavian Working Papers in Economics

Working Papers in Economics and Statistics,
Linnaeus University, School of Business and Economics, Department of Economics and Statistics

No 1/2024: The Capital Advantage: Comparing Returns to Ability in the Labor and Capital Markets

Spencer Bastani (), Kristina Karlsson (), Jonas Kolsrud () and Daniel Waldenström ()
Additional contact information
Spencer Bastani: IFAU - Institute for Evaluation of Labour Market and Education Policy
Kristina Karlsson: Department of Economics, Uppsala University
Jonas Kolsrud: Department of Economics and Statistics, Postal: Department of Economics and Statistics, School of Business and Economics, Linnaeus University, 351 95 Växjö, Sweden
Daniel Waldenström: IFN - Research Institute of Industrial Economics

Abstract: Using administrative tax and military records, we show that cognitive ability is more strongly associated with capital income than with labor income. This result holds across intensive and extensive margins, across different income types, and after controlling for education, occupation, inheritance, and parental background. Higher ability individuals save more, are better at selecting high-return stocks, hold more risky assets, and are less likely to live hand-to-mouth. Capital market returns are higher for cognitive ability than for non-cognitive skills, and the difference is stable over time. Rising capital shares, fueled by technological progress, could therefore exacerbate cognitive ability-based economic inequality.

Keywords: Ability; Skills; Labor Earnings; Capital income; Wealth; Taxation

JEL-codes: D31; G11; H20; J24

Language: English

59 pages, January 15, 2024

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