Cognitive and non-cognitive skills and wages: the role of latent abilities on the gender wage gap in Peru

Recently there has been growing interest in the relationship between cognitive and non-cognitive abilities and labour market outcomes. A large literature provides evidence on the positive connection between cognitive test scores and higher wages. Fewer and newer papers have explored the correlation between non cognitive test scores and wages. However, attention is focused on developed countries. Test scores suffer two limitations. First, they can be considered outcomes of the schooling level and latent (unobserved) cognitive and non-cognitive abilities. Second, they are potentially measured with error. The main objective of this paper is to identify latent abilities and explore their role in the gender wage gap in a developing country: Peru. The main identification strategy relies on exploiting panel data information on test scores and arguing that time dependence across measures is due to latent abilities. We exploit two databases Young Lives Study (YL) and the Peruvian Skills and Labor Market Survey (ENHAB). Young Lives has panel data information on test scores and ENHAB has information on test scores and wages. Results show that even though when accounting for measured abilities differences in non-cognitive abilities seem irrelevant, when accounting for differences in actual latent ability non cognitive abilities account for important inter-gender differences in the endowment and returns of abilities. Moreover, inter-gender differences in latent abilities play an important role not only in wage profiles, but in schooling, employment and occupation decisions.Young Lives Working Paper 118. This paper was presented at a conference on Inequalities in Children’s Outcomes in Developing Countries hosted by Young Lives at St Anne’s College, Oxford on 8–9 July 2013. © Young Lives 201