# **I. Introduction**

In recent years, there has been a flurry of activity around a merging of economic and psychological thought and research regarding the concept of “skills” and how it is related to economic success. Hundreds of papers have estimated the returns to education using “years of schooling” to measure the impact of skills acquired on labor market success (see sources cited in Hanushek and Woessmann 2008, p. 615). Hanushek and Woessmann (2008) argues that this previous research suffers from serious measurement error<sup>2</sup> and should be discarded in favor of exploring the role that skills, rather than years of education, play in driving individual and aggregate economic success. The economists, largely led by the research and writings of James Heckman and co-authors,<sup>3</sup> have refined the concept of “skills” to encompass “cognitive” skills – roughly measured by IQ – and “non-cognitive” skills, roughly defined as personality traits and socio-emotional behaviors.

Cognitive skills are a much better predictor of individual and aggregate income than are years of schooling (see sources cited p. 617 in Hanushek and Woessmann 2008). For example, studies that use longitudinal data to regress labor force variables of young adults on cognitive test scores collected while the sample was in high school, find that a one standard deviation increase in a mathematics test score in 12<sup>th</sup> grade is correlated with 10-15 percent higher annual earnings by mid-twenties to early thirties (Mulligan 1999, Murnane et al. 2000, Lazear 2003). Similar results are found for the UK (McIntosh and Vignoles 2001) and Canada (Finnie and Meng 2001). Using literacy scores (to proxy cognitive skill measures) and labor force behaviors from the International Adult Literacy Survey (IALS), Hanushek and Zhang (2009) finds that a one standard deviation increase in literacy scores increases earnings by 9.3 percent in a 13 country sample. The impact of school attainment falls from 7.1 to 5.9 percent after controlling for literacy scores. A small set of papers find an impact of cognitive skills on wages in developing countries as diverse as Ghana (Glewwe 1996), Kenya (Knight and Sabot 1990), Pakistan (Alderman, Behrmann, Ross and Sabot 1996), and South Africa (Moll 1998).

Cognitive skills are necessary but not sufficient for economic success; for higher wages and greater employability, they must be complemented by non-cognitive skills.<sup>4</sup> The idea that non-cognitive skills are an important driver of economic success can be traced to Bowles and Gintis (1976) that explains that

> 2 Hanushek and Woessman (2008) identify two sources of measurement error.  First, there is a great deal of heterogeneity in the skills acquired at each level of schooling across countries, regions within countries, and schools within regions.  Second, much skill acquisition occurs outside of the classroom (Hanusheck 1979).

> 3 For examples, see Almlund et al. (2011) and Borghans et al. (2008) for reviews of the economics literature. 4 Bowles, Gintis and Osborne (2001a), Mueller and Plug (2006), Carneiro, Crawford and Goodman  (2007), and Kniesner and ter Weel (2008)  find that personality traits matter more than cognitive skills for employment outcomes, especially among occupations requiring basic cognitive skills (Bowles, Gintis and Osborne 2001).

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