On the Importance of Soft Skills in the U.S. Labor Market

EPP master project by Antonio Biondi, Zacharias Kountoupis, Joan Rabascall, and Marco Solera ’20

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Abstract

This paper explores the role of soft skills in the U.S. labour market. According to the previous literature, these skills – also called non-cognitive- are crucial as they allow firms to lower coordination costs by trading job tasks more efficiently. We look at both sides of the labour market.

On the demand side, we collect 4,980 job ads from U.S. job portals through a web scraping technique, finding that larger firms require more job tasks and soft skills in their ads than the small and the medium ones.

On the supply side, we match the skills from the O*NET dictionary with the Survey of Income and Program Participation (SIPP) of the United States from 2013 to 2016, estimating return to soft skills around 15% of hourly wage. Moreover, we find statistically significant soft skills wage premium in the big firms around 2.5%, up to 3.5% for highly educated workers.

To the best of our knowledge, this is the first paper that finds a firm size wage premium for soft skills. These pieces of evidence suggest that larger enterprises are willing to pay more soft skills as they face higher coordination costs.

Conclusions

An increasing literature is focusing on the role of “soft skills” as the critical driver for labour market outcomes. A growing body of empirical evidence documents a reversal in demand for cognitive and soft skills: stagnating or even decreasing the first one, sharply increasing the second one.

A possible explanation is given by the fact that soft skills are associated to job tasks that are harder to replace by the automation, as they are mainly composed of tacit knowledge that is tough to encode (Autor, 2015). In this paper we analyse the role of soft skills in the U.S. labour market and their impact on wage.

As regards the supply side, we use the factor analysis to collect skills and abilities, finding a return to soft skills around 15% on U.S. hourly wage, that is almost four times higher than the return to cognitive abilities (4%). Moreover, we found a statistically significant soft skills wage premium in larger firms around 2.5% of hourly wage, up to 3.5% for those highly educated. We also document a strong complementarity between the firm size wage premium and level of education, especially for women: for this latter, the premium starts from 3% and increases to 4,5% when considering only those with more than 12 years of schooling. Results are consistent with our hypothesis, according to which soft skills are more valuable when increasing the size of firms as they are supposed to face higher coordination costs, compare to small enterprises.

The demand side analysis supports our results. After collecting job ads from U.S. job portals, we found that larger firms require more soft skills than the small ones. Finally, we report an excess of demand for soft skills in comparison to their occupational needs.   

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