The Plateauing of Cognitive Ability Among Top Earners

Evidence from Sweden finds a strong relationship between cognitive ability and earnings up to annual earnings of ~$64k. There are no significant differences among the top three income percentiles.

Description automatically generated “…The figure above shows cognitive ability levels expressed with annual wage on the horizontal axis. Cognitive ability plateaus at high levels of occupational success. Precisely in the part of the wage distribution where cognitive ability can make the biggest difference, its right tail, cognitive ability ceases to play any role. Cognitive ability plateaus around €60,000 [$64,200] at under a standard deviation above the mean. There are no significant differences in ability between the three top income percentiles, despite there being 594 cases in each percentile bin and despite those in the 100th percentile earning more than double the wage of those in the 98th percentile. Past a certain wage threshold, having a higher wage is no longer telling of cognitive ability. The average score individuals in the top percentile achieved as adolescents on the cognitive-ability test is 7.15 ± 0.11 (95% confidence interval). On a stanine scale this amounts to less than a standard deviation (+0.86) above average. …”

The Evidence

Cognitive ability

“…We draw on standardized test results of cognitive ability among male conscripts. The Swedish military enlistment procedure consisted of a series of physical, psychological, and intellectual tests all men had to take at age 18–19. Motivation for participation in military service was not a factor for evaluation as avoiding enlistment by obtaining low-ability scores was not possible (Lindqvist and Vestman, 2009). Early-life measurement of cognitive ability circumvents endogeneity problems which may arise when using ability scores measured after job market entry (e.g. Aldén, Hammarstedt and Neuman, 2017): One can plausibly assume that learning on the job is steeper in highly paid jobs and that these learning effects may reduce the role of innate ability in later-life cognitive skills. The enlistment procedure included an assessment of cognitive ability similar to the AFQT used in the United States (Carlsson et al., 2015), which was found a better predictor of wages than IQ test scores (Borghans et al., 2016). There were separate paper and pencil tests for verbal understanding, technical comprehension, spatial ability, and logic. Each test consisted of 40 items presented in order of increasing difficulty and speed (Carlstedt and Mårdberg, 1993) and grades from each dimension were combined into a normally distributed stanine scale ranging from 1 to 9 (Lindqvist and Vestman, 2009). This measure has been frequently used in medical studies (e.g. Åberg et al., 2009) and in the social sciences, for example for assessing managers’ intelligence (Adams, Keloharju and Knüpfer, 2018), entrepreneurs’ balance in skill sets (Aldén, Hammarstedt and Neuman, 2017), the importance of social origin in achieving promotions to managerial positions (Bihagen, Nermo and Stern, 2013), and the effect of smart teachers on student performance (Grönqvist and Vlachos, 2016). With only minor revisions implemented over the years, this procedure evaluated the same four underlying dimensions of ability throughout the full observation period….”

Labour-market success

“…We consider two success measures, individuals’ average annual wage and their average occupational prestige during a 11 year career window (age 35–45) centred on the age of 40 (Haider and Solon, 2006). We measure annual gross wage—directly reported by employers to the Swedish tax authorities—in hundreds of thousands of Swedish krona (roughly equivalent to units of 10,000 present-day Euros). We include years of part-time employment and of zero-income, and our measure includes bonuses paid out as additional, directly taxable wage income. We adjust annual wages for inflation (using an OECD consumer price index for Sweden, with base year 2012) to make wages comparable between individuals who entered the labour market in different calendar years where the same nominal incomes represent different levels of purchasing power. See Figure 2B and Table 1 for descriptives of the wage variable. To demonstrate the robustness of our findings, we change to snapshot annual wages in individuals’ 2nd, 10th, and 20th year of labour-market participation in Appendix A. Because these snapshots do not require a balanced panel of individuals with 11 years of labour-market participation, we can include up to 238,000 earners in these analyses. Our second measure of labour-market success is occupational prestige, measured on the International Socio-Economic Index (ISEI) scale, where higher values indicate occupations with greater social status (Ganzeboom, De Graaf and Treiman, 1992). We obtain ISEI scores from employees’ registered occupation which are available for 49,022 employees. Following the above operationalization, we measure individuals’ multi-year average occupational prestige (see Appendix A for prestige in the 2nd, 10th, and 20th career year). Ranging from 16 (farm workers) to 90 (judges), ISEI averages 48.9 and density peaks at low (e.g. industrial workers, construction workers), intermediate (e.g. office clerks, policemen), and sub-top levels (e.g. accountants, engineers; see Figure 2C)…”

Results

“…Figure 3A shows the conditional mean, geometric mean, and median wage for each cognitive-ability score. The figure reproduces the positive effect of ability on wage identified in earlier work (Coward and Sackett, 1990; Herrnstein and Murray, 1994; Ng et al., 2005; Strenze, 2007; Jokela et al., 2017). The rank correlation between ability and wage equals ρ = 0.400 (P < 0.001; N = 59,387). The monotonicity of the relationship in Figure 3A is consistent with previous studies (Lubinski, 2016; Gensowski, 2018) rejecting the claim that past a certain threshold having even higher cognitive abilitydoes not matter (Gladwell, 2008). The most able Swedish men can expect to make more money than less able others. The substantive magnitude of the relationship is, however, modest, as the worst scoring men on average still earn more than a third of the salary of the best scoring men. The most cognitively able individuals clearly cannot expect outlandish labour-market returns (Rosen, 1981; Frank and Cook, 1995; Borghans and Groot, 1998; Neal and Rosen, 2000; Brynjolfsson and McAfee, 2011; Mankiw, 2013). Figure 3B flips the axes, conditioning ability on wage to allow an evaluation of the comparative intelligence of top earners. Each dot represents the average ability level for a wage percentile. The figure reveals a marked contrast between the body and the tail of the wage distribution, with a strong correspondence at intermediate wage levels, while above a certain wage level average ability plateaus at an average of around 7.25. This plateauing of the wage–ability relation occurs at approximately SEK600,000 annual wage (about €60,000). In the three top wage percentiles, that earn between SEK800,000 and SEK8,400,000 annually, the relationship even slightly reverses. As in our model simulations (Figure 1C), there are no significant differences in ability between the three top income percentiles, despite there being 594 cases in each percentile bin and despite those in the 100th percentile earning more than double the wage of those in the 98th percentile. This result supports our hypothesis, and it suggests that the inverse of Gladwell’s (2008) claim does hold: Past a certain wage threshold, having a higher wage is no longer telling of cognitive ability. The average score individuals in the top percentile achieved a adolescents on the cognitive-ability test is 7.15 ± 0.11 (95 per cent confidence interval). On a stanine scale this amounts to less than a standard deviation (+0.86) above average. Figure 3C shows the same 100 cognitive ability levels but this time expressed with wage percentiles on the horizontal axis. The upper part of the distribution exhibits the predicted concave pattern, just as it does in Figure 3B. This lends further support to our hypothesis.

“…Figure 4 shows results when using occupational prestige instead of wage as measure of career success. Results are similar as for wage: Figure 4A shows that expected prestige monotonically increases in cognitive ability, with extremely intelligent people having the best job-market prospects. Yet when ability is conditioned on occupational prestige in Figure 4B, we find no systematic pattern in how average cognitive ability varies between those with ISEI scores 70 and above. Individuals in these professions (judges, lawyers, professors, and doctors) achieved an average cognitive- ability test score of 7.13 ± 0.04, which is less than a standard deviation (+0.80) above the mean….”

Marc Keuschnigg, Arnout van de Rijt and Thijs Bol, “The Plateauing of Cognitive Ability Among Top Earners,” European Sociological Review, 28 January 2023, https://academic.oup.com/esr/advance-article/doi/10.1093/esr/jcac076/7008955