Turning to labor market indicators, approximately 62% of individuals in the sample are employed. Of the employed, 51% are wage workers, 60% are white‐collar workers and 49% are formal workers. The standardized average log hourly wage is 1.25 soles, with a standard deviation of 0.88.<sup>10</sup>

# **A. Cognitive Skills**

The American Psychological Association defines cognitive skills as the “ability to understand complex ideas, to adapt effectively to the environment, to learn from experience, to engage in various forms of reasoning, to overcome obstacles by taking thought” (Neisser et al. 1996). This may include intelligence, reasoning, information‐processing, perception, memory, literacy, numeracy, and learning. Measures of cognitive skills include IQ Tests, memory recollection, coding speed, and standardized achievement tests.<sup>11</sup> Our data set measures four dimensions of cognitive skills.<sup>12</sup> First, the Peabody Picture Vocabulary test (PPVT‐4) measures receptive vocabulary and the verbal ability of adult subjects, in other words, verbal ability and scholastic aptitude. The test taker is presented a page with four pictures; the examiner says a word and the test taker points to the picture on the page that corresponds to that word. The process is continued until the test taker cannot successively correctly identify the picture corresponding to the word presented by the examiner.<sup>13</sup> Second, a verbal fluency test developed by Cueto, Muñoz and Baertl (2010) assesses how quickly and easily individuals access words from memory. Individuals are asked to write as many words that begin with a specific letter (in our case “P”) in a given time. The test measures verbal fluency as it relies on word knowledge, strategic retrieval search and performance monitoring, and speed to process information. A third test was designed to test short term memory.<sup>14</sup> In the digit recollection test, respondents are asked to repeat numbers in the same sequence as read by the enumerator. The test begins with two to three numbers, increasing until the person commits errors. Finally, Cueto, Muñoz and Baertl (2010) developed a test of numeracy knowledge and problem solving<sup>15</sup> that requires basic operations such as addition, subtraction, multiplication, division and percentage.

Table 2 shows that the four cognitive measures are correlated with each other and with years of education. The correlation among the cognitive measures ranges from 0.32 (verbal fluency and working memory) to 0.57 (verbal and numerical abilities). All correlations are statistically significant at 10% level.

The kernel density plots of cognitive skills presented in Figure 1 show a varied distribution of skills. While numerical ability is normally distributed, verbal ability has a visible bimodal distribution

> 10 In absolute terms, this is equivalent to 5.62 soles, with a standard deviation of 11.23.

> 11 For a summary of tests to measure cognition, see Almlund et al. (2011).

> 12 Cueto, Muñoz and Baertl (2010) provide a full explanation on the design and implementation of these tests.

> 13 The PPVT was originally intended to measure literacy skills in children, but version 4 was developed to measure these skills in adults.  Cueto, Muñoz and Baertl (2010) document that while there is a version of the PPVT test in Spanish it was targeted to adolescents rather than adults; they adapted the PPVT‐4 test to Peruvian Spanish

> 14 te Nijenhuis and van der Flier (2004); and te Nijenhuis, Resing, Tolboom and Bleichrodt, (2003) find that short term memory test such as forward digit span are a good predictor of working memory.

> 15 Numeracy measures logic and reasoning, and is also a good predictor of fluid and crystallized intelligence.

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