Labor Market Returns and the Evolution of Cognitive Skills

A large literature in cognitive science studies the puzzling “Flynn effect” of rising fluid intelligence (reasoning skill) in rich countries. The paper presented in this Mannheim Applied Seminar develops an economic model in which a cohort’s mix of skills is determined by skills’ relative returns in the labor market and by the technology for producing skills. The paper estimates the model using administrative data from Sweden. Combining data from exams taken at military enlistment with social security earnings records, the authors 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 35 percent of the measured increase in reasoning skill, and can also explain the decline in knowledge. An original survey of parents and a review of trends in school curricula show evidence of increasing emphasis on reasoning as compared to knowledge.