Returns to balance in cognitive skills for the self-employed: evidence from 18 countries

Is there a positive contemporaneous association between balance in cognitive skills and self-employment earnings? In this paper, we extend past studies that draw on balance in cognitive skills tests administered at an early age and use the balance in scores on cognitive skills tests administered during 2011–2012 in the Programme for the International Assessment of Adult Competencies (PIAAC), a cross-sectional sample of 47,768 adult participants from 18 countries. Lowering concerns for cognitive skills measured at an early age, PIAAC’s measure of cognitive skills provides a contemporaneous measure of cognitive skills also accumulated through past experiences. Using a standardized measure of cognitive skills across participating countries, PIACC also lowers concerns for measurement error resulting from cultural bias in country-specific cognitive skills tests. Extending the entrepreneurship earnings puzzle—lower average income for the self-employed relative to wage earners—a greater balance in cognitive skills among the self-employed helps close earnings gaps with wage earners. However, balance in cognitive skills is not associated with self-employment. The implications of the findings are discussed.