Estimating the college income premium accounting for cognitive and non-cognitive latent skills

Abstract

In this paper, we estimate the returns to higher education in Brazil, controlling for the effects of latent abilities. We leverage a unique data that measures cognitive and noncognitive abilities to estimate a structural factor model that accounts for the effects of latent cognitive and noncognitive skills. We find that college returns are on average 43% and they are positive even for the lowest levels of cognitive and non-cognitive skills. Additionally, both cognitive and non-cognitive skills influence the probability of having college education, but cognitive abilities have a larger effect. Among the college educated workers, cognitive skills are more important for earnings, but among the unskilled workers, non-cognitive skills are more rewarded.