Scandinavian Working Papers in Economics
Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy
No 2023:8: The different returns to cognitive ability in the labor and capital markets
Spencer Bastani (), Kristina Karlsson () and Daniel Waldenström ()
Additional contact information
Spencer Bastani: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden
Kristina Karlsson: Department of Economics, Uppsala University, Postal: Department of Economics, Uppsala University
Daniel Waldenström: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics (IFN)
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.
Keywords: Ability; Skills; Education; Capital income; Wealth
Language: English
42 pages, March 31, 2023
Full text files
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