Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2021:2: Labor Market Returns and the Evolution of Cognitive Skills: Theory and Evidence

Santiago Hermo (), Miika Päällysaho (), David Seim () and Jesse Shapiro ()
Additional contact information
Santiago Hermo: Brown University, Postal: Brown University, Providence, RI 02912, USA
Miika Päällysaho: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
David Seim: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Jesse Shapiro: Harvard University, Postal: Harvard University, Department of Economics, Littauer Center, Cambridge, MA 02138, USA

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: Flynn effect; IQ; skill investment; human capital; administrative data

JEL-codes: J24; J31; O52

Language: English

61 pages, First version: August 23, 2021. Revised: January 20, 2022. Earlier revisions: January 18, 2022, January 18, 2022, January 20, 2022.

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