Our results indicate that conscientiousness is positively associated with wages, while ***agreeableness***, extraversion, and neuroticism are associated with negative returns

McLean, D., Bouaissa, M., Rainville, B., & Auger, L. (2019). Non-Cognitive Skills: How Much Do They Matter for Earnings in Canada?. American Journal of Management, 19(4). https://doi.org/10.33423/ajm.v19i4.2392

Abstract: Evidence from different countries suggests that non-cognitive skills play an important role in wage determination and overall social outcomes, but studies for Canada are scarce. We contribute to filling this gap by estimating wage regressions with the Big Five traits using the Longitudinal and International Study of Adults. Our results indicate that conscientiousness is positively associated with wages, while agreeableness, extraversion, and neuroticism are associated with negative returns, with higher magnitudes on agreeableness and conscientiousness for females. Cognitive ability has the highest estimated wage return so, while significant, non-cognitive skills do not seem to be the most important wage determinant.

Keywords: Management, Labour Market, Returns to Skills, Non-Cognitive Skill, Cognitive Skill, Wage Regressions, Personality Traits, Five-Factor Model


REVIEW OF RELEVANT LITERATURE

Gary Becker set the stage for the present analysis in the 1960s by being among the first to formally
describe the process of engaging in education as an individual investment decision, with pay-offs in the form of higher future wages. This ultimately motivated Jacob Mincer ten years later to develop the famous Mincer Equation, which attributed differences in cross-sectional wages to differentials in
schooling and experience.
In this framework, cognitive ability is seen as an endowment factor which differentiates marginal
productivity, helping to partially explain wage differentials. Cawley, Heckman and Vytlacil (2001)
estimate the magnitude of this effect using the NLSY survey, showing that a one standard deviation
increase in innate thinking ability is associated with between 10% and 15% higher wages. Both Cawley, Heckman and Vytlacil (2001) and Cunha, Heckman, Lochner and Masterov (2006) also suggest that, rather than being a fixed endowment, cognitive ability can evolve over a lifetime, dynamically affecting wages both through increased schooling and higher productivity. More recently, Hanushek, Schwerdt, Wiederhold, and Woessmann (2015) used data from the 2012 Programme for International Assessment of Adult Competencies (PIAAC) survey to examine the relationship between numeracy and literacy abilities and wages. They find evidence of a positive relationship, however concede that the selection process of high-skilled individuals into higher levels of schooling may confound the true effect. Cawley, Heckman and Vytlacil (2001) find that cognitive ability, while statistically a significant predictor of income, explains only a small fraction of the variation in income, suggesting that other, unobserved factors may also play a key role in determining economic success. This then opens the discussion on the ability of other unobserved traits to affect economic outcomes of an individual. Mischel (1973) argued that personality traits are one fundamental factor in helping determine how an individual responds to stimulus in their environment in a consistent way. Thus we could reasonably expect personality traits to form a part of an individual's stock of human capital and to be associated with labour market outcomes.
Non-cognitive skills are notoriously difficult to measure, given the lack of consensus in the literature
on their definition and which proxies are most appropriate. One strategy that has received widespread
acceptance involves quantifying non-cognitive skills using the Five Factor Model (Goldberg, 1971; Costa and McCrae, 1985). The Five Factor model posits the existence of five distinct but not necessarily orthogonal personality characteristics, the Big Five personality traits. These characteristics, Openness to Experience, Conscientiousness, Extraversion, Agreeableness and Neuroticism, are traits that are theorised to help determine a personality that is consistent across time and situation. The Big Five are derived from well-established definitions in the psychology literature dating back to the seminal lexical work by Allport and Odbert (1936), and have seen applications in numerous economic studies attempting to find links between personality and learning, work, romantic and social outcomes. The traits are characterised as relative rigid over the life cycle, particularly by the age of 25-30 (Cobb-Clark and Schurer, 2011).1
Each of the Big Five dimensions in turn are made up of several smaller personality facets, which are
typically more easily measured using survey questions. John and Srivastava (1999), McCrae and John
(1992) and others outline the history of the Five Factor Model and in particular highlight which facets are associated with which personality dimensions. Openness to Experience, for example, is associated with concepts at the intersection of intelligence and ingenuity such as imagination, being artistic and
thoughtfulness. Neuroticism, on the other hand, is associated with facets such as anxiety, selfconsciousness, and vulnerability. Facets for the other three dimensions can be found in Appendix A.
While the Five Factor Model has its criticisms, its robustness, relative ease of interpretation and
applicability to survey questionnaires have made it an attractive option for economists interested in
studying personality. Numerous papers have attempted to tie these personality traits to economic
outcomes, including two early papers by Barrick and Mount (1991) and Tett, Jackson and Rothstein
(1991) who review work linking these characteristics to the labour market. Barrick et al. in particular find that conscientiousness has a strong positive correlation with job performance for all occupational groups, while the impact of the other four traits are differentiated by occupation type. Judge, Higgins, Thoresen Barrick and Murray (1999) use longitudinal data to find that conscientiousness and extraversion are positively related to various metrics of career success, while neuroticism and agreeableness are negatively correlated. Nyhus and Pons (2005), Mueller and Plug (2006), and Heineck and Anger (2010) unanimously find that conscientiousness is the most positively associated with and predictive of higher earnings, while agreeableness and neuroticism may be associated with negative returns. Nyhus and Pons find extraversion to have negative returns, while Mueller and Plug find this is true only for females.
Mueller and Plug are also the only to find a positive estimated return to openness to experience. Almlund (2011) affirm these main findings, suggesting that conscientiousness is the best overall predictor of job performance, though this correlation decreases with increased job complexity. Openness to experience and extraversion are found to be positively associated with job performance but only indirectly through education. A positive relationship between extraversion and education is not a consistent finding, however, as Goldberg (1998) and van Eijck and de Graaf (2004) find a slight negative relationship between educational attainment and neuroticism, extraversion and agreeableness.
Of course, using the Big Five dimensions is also not the only identification strategy used in the
literature. In a highly influential paper, Heckman and Rubinstein (2001) use enrolment in a General
Education Development (GED) program as a measure of non-cognitive skill and find that differences in social skills between GED and high school graduates explain a large proportion of the wage differential between the two groups. Heckman, Stixrud and Urzua (2006) used the Rotter Locus of Control Scale and the Rosenberg Self-Esteem Scale derived from the 1979 National Longitudinal Survey of Youth (NLSY) as their preferred indicators, again finding evidence that non-cognitive skills strongly influence schooling decisions and wages. In another influential paper, Lindqvist and Vestman (2011) use an administrative dataset of Swedish military enlistees to derive a measure of personality as assessed by interviews with professional psychologists. Their results show that individuals who struggle with low earnings and unemployment are systematically characterised by low non-cognitive skill scores. Borghans, ter Weel and Weinberg (2014) use data from the NLSY to determine if differences in non-cognitive skills are able to predict wage differentials between minority and gender groups. In a related line of thinking, they look at whether returns to what they term ‘people skills’ have increased or decreased with time. They find that, between the 1970s and 1990s, non-cognitive skills have become increasingly important determinants of wages, which they attribute to an increased substitution of technology to perform tasks. This line of reasoning is affirmed by Weinberger (2014), Deming (2017) and Edin, Fredriksson, Nybom and Öckert (2017), who each find evidence of returns to non-cognitive skills increasing over time, and their growing importance to working in high-paying managerial occupations.
While the existing literature provides evidence for a wide array of OECD countries, to our
knowledge there is only one paper that examines the data specifically for Canada. Green and Riddell
(2003) use Canadian male respondents from the 1994 International Adult Literacy Survey (IALS) to
conclude that an individual's cognitive abilities are primarily established during formal schooling. In line with the literature, they also suggest that cognitive and non-cognitive skills affect earnings both
independently and through an interplay between them. Our work in this paper thus builds upon the
foundation established by Heckman, Green and Riddel and others that already exists in the literature. We contribute to the knowledge gap in the literature first by directly measuring both cognitive and noncognitive skills and focussing on how cognitive and non-cognitive skills are independently rewarded in the Canadian labour market. To our knowledge, we are also among the first to use the Longitudinal
International Survey of Adults (LISA) to analyse this question, which will allow us to offer further
empirical evidence to the literature from an under-studied OECD country. The advantages of using the LISA survey are two-fold. First, it offers some of the most recent data available for studying earnings and wage data, and will also allow for the robust examination of heterogeneity in cognitive and non-cognitive skill returns across a wide spectrum of Canadian workers.1