Does Schooling Raise Earnings by Making People Smarter?

Schooling raises individuals' scores on cognitive tests. It also raises individual earnings. What is the connection between these two facts? Many have interpreted the substantial economic returns to schooling as evidence for the importance of cognitive skills as a determinant of individual earnings. But skill enhancement is not the only way schooling a ects earnings. We shall argue that schooling raises wages and output per hour of labor in part by transforming individuals in ways that are pro table for employers, but are not the sort of `skills' that appear as arguments in a production function. We do not question that schools also produce such skills and that these skills are important in production, but if we are correct, skill enhancement explains only part of the contribution of schooling to individual earnings. Instead, we argue, schooling also raises earnings by its e ects on individuals' norms and preferences, making the prospective worker more attractive