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The Return to Cognitive Skills in the Australian Labour Market


  •  I thank Jason Abrevaya, Kadir Atalay, Chris Bidner, Mario Fiorini, Giovanni Forchini, David Green, Brett Inder, Adrian Pagan, Raja Junankar, seminar participants at Monash University, University of Sydney, University of Technology Sydney, University of Western Sydney, participants at the Econometric Society of Australasia Meetings 2009 and ‘Frontiers in Human Capital Research’ Conference 2010 at the University of Wollongong, the editor Paul Miller and two anonymous referees for comments and suggestions. Jimmy Chen and Rebecca Edwards provided excellent research assistance. The usual disclaimer applies.

Garry Barrett, School of Economics, University of Sydney, Sydney, NSW 2006, Australia. Email:


The labour market returns to education and cognitive skills are examined using the Australian component of the IALS from 2006. A key feature of the data is the availability of objective measures of literacy, numeracy and problem-solving skills, along with a rich array of personal and job-related characteristics. The mean return to an additional year of education is estimated to be 6.2 per cent, almost one-third of which may be attributed to the acquisition of cognitive skills. Controlling for cognitive skills in the earnings equation has a small effect on the estimated return to labour market experience, while accounting for approximately half of the negative wage gap for immigrants from NESBs. The return to cognitive skills is uniform across quantiles of the conditional hourly earnings distribution. There is strong evidence of credentialism in the returns to education in Australia. A significant component of the ‘sheepskin’ effects in the returns to education is attributable to the higher cognitive skills associated with the completion of a credential.