aim at improving youth’s employability by strengthening their cognitive and non‐cognitive skills as well as helping them identify and follow a life plan.<sup>8</sup> This paper explores the role that cognitive and personality traits (a facet of non‐cognitive skills) play in labor market outcomes in Peru. It contributes to the existing literature in two ways. First, it adds a new data point to the very limited evidence about whether non‐cognitive skills are valued in developing economies. More importantly, though, it builds on the methodology presented in Heckman, Urzúa, and Stixraud (2006) to estimate of the effect of ability, as proxied by latent (rather than measured) skills, on wages and labor supply to more robustly measure both cognitive and non‐ cognitive skills, thereby permitting cleaner correlations than those estimated in the other developing country literature. Second, as a contribution to the more general skills literature, it explores the degree to which measurement error biases standard OLS estimates. The paper compares OLS estimates derived from measured skills and MLE estimates that employ latent skills measures, where the latter intends to correct for problems of measurement error emerging from written tests and multi‐collinearity, which affect the precision of estimates derived from more standard methodologies.

# **II. Data and Definitions**

This paper uses the National Skills and Labor Market Survey ( _Encuesta Nacional de Habilidades_ , ENHAB), collected in January through March 2010, which is based on the standard Peruvian household survey (ENAHO), augmented by modules measuring cognitive skills and personality traits. These cross‐sectional data were gathered from a random sample of youth and adults in 11 cities (57 districts) in the three regions of Peru (coast, Andes and jungle).<sup>9</sup> The cognitive and non‐ cognitive test batteries were applied to a randomly selected adult at home, resulting in a sample of 1,394 individuals aged 18‐50. Additional variables that provide early proxies for acquisition of abilities were also captured, including parental education and distance to primary school.

In Table 1, we present the descriptive statistics of the variables of interest. Females comprise 63% of the sample. Individuals are on average 32 years old and 10 percent report speaking an indigenous language as their mother tongue. One third of the individuals in the sample live in Lima, another third in the Coastal region, and the rest are equally distributed in the Andes and the Jungle regions.

The average individual has pursued about 12 years of education. About 60% of the sample has mothers with primary education or less. Another 20% have mothers who have completed secondary school while 8% have mothers who have pursued higher education. The distribution of individuals according to their father’s education is similar; however, the proportion of individuals whose father has pursued higher education is 16% (13% completed) while the proportion of those with a father who has less than primary school is 8%.

> 8 “ _Fortalecimiento de Habilidades para el Empleo_ ”.

> 9 Cueto, Muñoz and Baertl (2010) <u>page 8.</u>

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