The Evolution of Returns to Cognitive Skills across Countries: Evidence on Factor Price Equalization

Abstract

Globalization and technological change are constantly changing the demand for skills in national economies. We estimate how returns to cognitive skills have evolved over the past decade in 23 developed countries and find strong convergence in the price of skills, a central implication of factor price equalization. The psychometrically linked PIAAC surveys of adult skills in 2012 and 2023 allow internationally comparable estimates of skill returns over time. On average across countries, earnings increase by 17.8 percent per standard deviation in numeracy skills in 2023, a decline from 20.0 percent in 2012. Estimates of returns to cognitive skills are hardly affected by conditioning on non-cognitive skills. But there is substantial cross-country heterogeneity with one third of countries seeing increased returns. Strikingly, much of the cross-country variation in changes in skill returns is accounted for by global convergence, whereas other factors, including technological change, explain little. Consistent with adjustment mechanisms emphasized by factor-price-equalization theory, convergence is faster in countries with greater labor-market flexibility and openness to trade, especially in intangibles.