Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1459: The Different Returns to Cognitive Ability in the Labor and Capital Markets

Spencer Bastani (), Kristina Karlsson () and Daniel Waldenström ()
Additional contact information
Spencer Bastani: Institute for Evaluation of Labour Market and Education Policy (IFAU), Postal: and Research Institute of Industrial Economics (IFN), Stockholm, Sweden,
Kristina Karlsson: Department of Economics, Uppsala University, Postal: and Research Institute of Industrial Economics (IFN), Stockholm, Sweden
Daniel Waldenström: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

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

JEL-codes: D31; H20; J24

Language: English

44 pages, April 28, 2023

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