How Does Education Affect Labor Market Outcomes: The Effect of Schooling on Cognitive and Non-Cognitive Skills

We study the effect of a compulsory education reform that increased the compulsory level of schooling by two years on the development of cognitive and noncognitive skills and its subsequent impact on long-term labor market performance. We link individual data on cognitive and non-cognitive test scores before and after reform exposure, reform treatment, and labor market outcomes. This allows us to trace the channels through which education affects socio-economic outcomes later in life. The reform was implemented by Swedish municipalities in a staggered manner during the 1950s and 1960s. We first show that the reform had a significant impact on the development of cognitive and non-cognitive abilities of young men during their teens. However, the effects on cognitive and non-cognitive skills accrue to boys coming from different parts of the socio-economic distribution. Finally, we show that the gains in skills due to the reform are reflected in long-term labor market outcomes. JEL codes: J38, J24, I20 * We are grateful to Tamara Sobolevskaya for excellent research assistance. 1 Department of Economics, Yale University Box 208264 New Haven, CT 06520-8264, USA; IFS and ESRC. E-mail: [email protected]. 2 Department of Economics, Stockholm University, SE-106 91 Stockholm, Sweden. E-mail: [email protected]. 3 Princeton University and Tufts University. E-mail: [email protected].