Inequality and ability

This paper examines how much the increasing “residual inequality” in the United States can be explained by increasing returns to cognitive skills. Also, this paper uses selection-correction techniques to estimate the latent population distribution of unobservable skill within three occupational sectors, and breaks down the leftover “residual” term into a “general” unobservable component and a sector-specific unobservable component. The results indicate that sector-specific skills have played only a minor role in the inequality trends. Increasing “residual inequality” is mostly characterized by an increasing importance of general skills, either IQ or the general unobservable skill, within all three occupations.