# **I. Introduction**

In recent years, there has been a re‐thinking of the concept of “skills” and how it relates to economic success. While hundreds of papers have estimated the returns to education using “years of schooling” as a proxy for understanding the impact of skills acquired on labor market success, more recent work (Hanushek and Woessmann 2008) argues that this previous research suffers from measurement error.<sup>1</sup> Instead, there is a growing effort to more accurately measure a range of skills and to correlate them with individual and aggregate economic success variables. In this strain of literature, economists have relied on works from behavioral and personality psychologists that refine the concept of “skills” to encompass “cognitive” skills and “non‐cognitive” skills (see for example Almlund, 2011). The former refers to all forms of knowing and awareness such as perceiving, conceiving, remembering, reasoning, judging, imagining, and problem solving” (APA, 2006), while the latter is roughly defined as personality traits and socio‐emotional behaviors that guide the way people feel, behave and react to different stimulate (Borgans et al., 2008).

The emerging literature confirms that higher measures of cognitive skills are associated with higher wages, even when holding constant years of education. For example, studies that use longitudinal data from the US to fit models of labor force variables of young adults and cognitive high school test scores, find that a one standard deviation increase in a mathematics test score in 12th grade increases annual earnings by 10‐15 percent during their 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, Behrman, Ross and Sabot 1996), South Africa (Moll 1998), and Argentina (Tetaz and Cruces 2009).

Similar results are found for the effect of non‐cognitive skills on wage earnings. Early work by Bowles and Gintis (1976) observes that a measurable part of the variance in earnings among observationally equal individuals with equal levels of education, are due to behavioral skills. Carneiro and Heckman (2003) report that participants in the Perry Pre‐School program, who received intensive non‐cognitive development interventions as children, have similar cognitive abilities but higher non‐cognitive abilities than non‐participants who were randomly selected out of the program; participants also have greater scholastic and labor market success as adults. Focusing on adults, Heckman, Stixrud and Urzúa (2006) find that both cognitive and non‐cognitive skills are important in explaining higher wages, shorter job search periods, and occupational choice, and that non‐cognitive skills are particularly important for those with lower levels of education, women, and youth.

> 1 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).

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