Literacy and earnings: an investigation of the interaction of cognitive and unobserved skills in earnings generation

This paper uses direct measures of literacy to examine the influence of cognitive and unobserved skills on earnings. We find that cognitive skills contribute significantly to earnings and that their inclusion in earnings equations reduces the measured impact of schooling. The impact of literacy on earnings does not vary across quantiles of the earnings distribution, schooling and literacy do not interact in influencing earnings, and introducing literacy has little effect on the estimated impact of experience. Our findings suggest that cognitive and unobserved skills are both productive but that having more of one skill does not enhance the other's productivity.