Cognitive Skills Matter in the Labor Market, Even for School Dropouts

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Between 1979 and 1996 the median earnings of 25-34 year-old males who left school before obtaining a high school diploma fell by 30 percent; the corresponding figure for female dropouts is a 21 percent decline. Over this same period the earnings premium four-year college graduates received over the earnings of male school dropouts increased from 60 percent to 133 percent. The primary explanation for these patterns is that the demand for unskilled workers declined relative to the demand for skilled workers. While these between-group changes have been well analyzed, little research has examined what is taking place among the least educated in the workforce. Do skills matter among dropouts in this information age economy?

While the average cognitive skill level of school dropouts is quite low, there is considerable variation among dropouts in cognitive skill levels. One could argue that, in an economy in which basic cognitive skills* are increasingly valued, differences in skills would translate into earnings differences for dropouts just as they do for workers with greater educational attainments. On the other hand, the economic trends that have depressed the average earnings of the less skilled may have relegated most young dropouts to entry level jobs where skills matter very little and consequently are not rewarded. This could be especially true for minority male dropouts, whose earnings in 1996 averaged 28 percent less than those of white male dropouts. This report presents evidence on the labor market payoff to cognitive skills for school dropouts, and whether the payoff differs by gender and race/ethnicity.


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