Explaining variable returns to cognitive skill across occupations

Data from the National Adult Literacy Study indicate that returns to literacy skill vary across occupations. Two possible explanations for such differences are examined: are returns to skill related (1) the skill demands of the occupation and (2) the institutional factors-namely, the level of unionization, public sector employment, and self-employment-that govern the wage-setting process within an occupation? The findings suggest that both the skill demands and institutional characteristics of an occupation shape the importance of cognitive skill for earnings. In particular, occupations with greater cognitive and interpersonal skill demands have increased returns to skill, while those with greater manual skill demands decrease the skills-earnings relationship. Occupations with a greater percentage of public sector workers decrease the importance of skills for earnings, but higher levels of unionization and self-employment within an occupation modestly increase returns to skill for workers.