Applied Economics

ISSN: 0003-6846 (Print) 1466-4283 (Online) Journal homepage: https://www.tandfonline.com/loi/raec20

Human capital and leadership: the impact of

cognitive and noncognitive abilities

Tingting Tong, Haizheng Li & Samuel Greiff

To cite this article: Tingting Tong, Haizheng Li & Samuel Greiff (2019): Human capital
and leadership: the impact of cognitive and noncognitive abilities, Applied Economics, DOI:
10.1080/00036846.2019.1619022

To link to this article: https://doi.org/10.1080/00036846.2019.1619022

Published online: 22 May 2019.

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APPLIED ECONOMICS
https://doi.org/10.1080/00036846.2019.1619022

Human capital and leadership: the impact of cognitive and noncognitive

abilities
Tingting Tonga, Haizheng Lib and Samuel Greiffc
a
International business college, Dongbei University of Finance and Economics, Dalian, China; bSchool of economics, Georgia Institute of
Technology and Hunan University, Atlanta, GA, USA; cThe Institute of Cognitive Science and Assessment, University of Luxembourg,
Luxembourg, Luxembourg

ABSTRACT KEYWORDS
We conduct an economic analysis about the impact of human capital on an individual’s potential Human capital; leadership;
of becoming a leader based on data from the Programme for the International Assessment of cognitive ability;
Adult Competencies Survey (PIAAC). Our human capital indicators include not only traditional noncognitive ability
measures such as education and experience, but also various measures of cognitive and non- JEL CLASSIFICATION
cognitive ability. Our cognitive ability measures include numeracy, literacy, and problem solving I21; J24
abilities, and noncognitive ability measures include perseverance, motivation to learn, and social
trust. We specifically investigate the effect of measurement error and reverse causality on the
estimation results. We find that problem-solving ability is the most important in affecting leader-
ship among cognitive ability measures, and perseverance shows the strongest impact among
noncognitive ability measures. As a leader supervises more employees, the role of cognitive and
noncognitive ability becomes more critical.

I. Introduction Chen, Grove., and Hussey 2017). Hanushek et al.

(2015) finds that cognitive ability is significant
It is believed that leadership is essential for busi-
predictor of wage, i.e. a one-standard deviation
nesses and organisations, because leaders are deci-
increase in numeracy skills is associated with an
sion-makers who choose the right direction for an
18% wage increase among prime-age workers. In
organisation. Leaders require a ‘package’ of skills
addition, studies found that noncognitive ability
as they are problem solvers who must identify the
explains a significant variation of the
problem, analyse causes, form plans and give
labour market outcome (e.g. Lundberg 2013;
instructions (Mumford et al. 2017). However,
Glewwe, Huang, and Park 2017).
only between 31% and 55% of large corporations
Based on Lazear (2012), leaders tend to be gen-
have a specific mechanism for systematically iden-
eralists rather than specialists because they con-
tifying leadership potentials of their employees in
front a wide variety of choices and these choices
the United States (Dries and Pepermans 2012).
span many fields. Therefore, it is a general skill,
One possible reason is that talents and skills pro-
not one specific talent or a particular technique,
cessed by leaders are difficult to measure and
that makes an individual a leader. Those general
quantify. Traditional human capital measures
skills can be represented by the human capital one
based on education level and experience cannot
possesses. Gibbons and Waldman (2006) shows
fully capture the effect of human capital on
that a worker is assigned to the high-level job
leadership.
(i.e. leadership position) if and only if her
In recent years, research on human capital has
expected human capital is greater than a certain
paid much attention to cognitive and noncognitive
critical level.
abilities as important factors in influencing one’s
However, it is challenging to measure those
labour market outcomes (e.g. Heckman, Stixrud,
general skills. Traditional measures are mostly
and Urzua 2006; Lindqvist and Vestman 2011;
based on education and on-the-job learning repre-
Eren and Ozbeklik 2013; Hanushek et al. 2015;
sented by experience. For example, Lazear (2012)

CONTACT Haizheng Li Haizheng.li@econ.gatech.edu School of economics, Georgia Institute of Technology, Atlanta, GA, USA
© 2019 Informa UK Limited, trading as Taylor & Francis Group
2 T. TONG ET AL.
showed that the number of previous roles an indi-
vidual held significantly increases the probability
of being a leader. Grönqvist and Lindqvist (2016)
found that officer training during military service
has a strong positive effect on the probability of
being a leader. Such human capital measures can-
not distinguish skills for those with the same edu-
cation level and job experience. Therefore, the
measure of human capital beyond education is
desirable in studying an individual’s
labour market outcomes. In this article, we inves-
tigate how human capital such as cognitive and
noncognitive ability affects an individual’s prob-
ability of becoming a leader, in addition to the
traditional human capital measures.
In recent years, cognitive and noncognitive abil-
ities are increasing recognized as important factors
in influencing one’s labour market outcomes.1 For
instance, Kuhn and Weinberger (2005) showed that
people who held leadership positions in high school
are more likely to earn higher wages and take man-
agerial positions as adults. Borghans, Well and
Weinberg (2008) showed that personality at age 16
can help predict job assignment in the future, i.e.
relatively caring (direct) people will end up working
at jobs that require more caring (direct) personal-
ities. Similarly, Krueger and Schkade (2008) showed
that individuals who are more gregarious tend to be
employed in jobs that involve more social interac-
tions. These studies show that one’s human capital
traits, even before completing education, help pre-
dict his/her future career.
Human capital traits can be represented by cogni-
tive and noncognitive abilities and are quite stable in
life. They play an important role in determining one’s
labour market outcome. Lindqvist and Vestman
(2011) found that noncognitive ability is an important
determinant of productivity. Moreover, Lindqvist
(2012) found that about one half of the height-
leadership relationship is due to a positive correlation
between height and cognitive and noncognitive abil-
ity. Moreover, Adam et al. (2018) found that noncog-
nitive ability is the best predictor of an appointment to
a CEO position, followed by cognitive ability.
This study conducts a more detailed investiga-
tion about the effects of human capital on
1
There is a large literature about leadership in the area of psychology and organizational behaviour literatures (See Zaccaro 2007; Yukl 2008,; Dinh et al. 2014
for a detailed review).
leadership by employing new measures of cogni-
tive and noncognitive abilities that are more spe-
cific to the leadership capability. Our cognitive
ability measures include numeracy, literacy, and
problem solving, and noncognitive ability mea-
sures include perseverance, motivation to learn,
and social trust. Moreover, we measure general
leadership based on the levels of the leadership
in a variety of ways, from the occupation position
to the number of employees supervised, to get
a better understanding of the impact of human
capital. Additionally, we specifically investigate the
potential endogeneity problem caused by mea-
surement error of the abilities and the potential
reverse causality between the measured abilities
and leadership experience.
We find that, among cognitive abilities, pro-
blem-solving ability, compared to numeracy and
literary ability, has the largest effect in determin-
ing the probability of being in a leadership posi-
tion, and perseverance appears to be important
noncognitive ability in determining leadership.
Moreover, the role of cognitive and noncognitive
abilities becomes more important as the number
of employees supervised increases. Our results also
confirm that traditional human capital measures
such as education and experience are both signifi-
cant predictors of leadership.
The rest of the article is organized as follows. In
Section 2, we set up a simple theoretical framework
on human capital and leadership. Section 3 intro-
duces the data, ability measures, and relationships
among human capital measures. Section 4 presents
estimation results. In Section 5, we investigate the
potential endogeneity issue, and Section 6 concludes.
II. Theoretical framework and empirical
strategy
We follow Gibbons and Waldman's (2006) con-
ceptual framework of job assignment and human
capital. Assume that all firms have two kinds of
jobs: managerial jobs ðj ¼ 1Þ, which are relatively
more complex, and ordinary jobs ðj ¼ 0Þ. We
define leaders as those individuals who conduct
managerial jobs in a firm (j ¼ 1).

Job assignment is based on productivity. In
a firm, if an individual is more productive in
a managerial job than in an ordinary job, then
the individual will be assigned to managerial
level jobs. Specifically, we define the output of
worker i assigned to job j as yij ,
yij ¼ dj þ Gj ðSi Þ þ cj hi þ uij
where dj is the output of job j that is independent
of the worker’s human capital. Si represents indi-
vidual i’s level of education and Gj ðSi Þ is
a function of education, and G0 j ðSi Þ > 0 for
j ¼ 0 or 1. In the model, hi represents individual
i’s human capital in addition to education. We will
refer to hi as non-schooling human capital, includ-
ing on-the-job learning (Learni ), cognitive ability
(Cogi ), and noncognitive ability (NonCogi ). In the
above equation, cj is the sensitivity of the output of
job j to the individual’s non-schooling human
capital, and uij is the error term.
Job characteristics include cj and dj , and we
assume d0 > d1 and c0 < c1 . As can be seen, h is
the level of non-schooling human capital at which
a worker is equally productive at jobs 0 and 1 (i.e.
Eðyi0 Þ ¼ Eðyi1 ÞÞ. Given a fixed schooling level,
Figure 1 displays the relationship between non-
schooling human capital and output. We can show
that
Figure 1. Non-schooling human capital and output, given
a fixed education level.
2
The link provides access to the PIAAC data: http://www.oecd.org/site/piaac/publicdataandanalysis.htm.
APPLIED ECONOMICS 3
d1  d0 þ G1 ðSÞ  G0 ðSÞ
hi  ¼ (2)
c0  c1
Given a fixed education level, when an individual
has zero non-schooling human capital (i.e.
hi ¼ 0), he/she will be relatively more productive
at ordinary jobs, i.e. d0 þ G0 ðSÞ > d1 þ G1 ðSÞ. As
(1) hi increases, the productivity growth in managerial
jobs is relatively faster than in ordinary jobs
(c1 > c0 ). To be a leader, in general, an individual
must be more productive in a managerial job than
in an ordinary job, and thus an individual must
have a non-schooling human capital higher than
h . According to Figure 1, given hi > h , at
a particular school level, the higher the non-
schooling human capital, the larger the difference
between productivities between a managerial and
an ordinary-level job, and thus the higher the
probability of being a leader. If education level
increases, the productivities

are expected to
increase (i.e. E yij shifts upwards).
Therefore, we specify the probability of being
a leader below,
ProbðleaderÞi ¼ f ðSi ; hi Þ þ ui
¼ f ðSi ; Learni ; Cogi ; Noncogi Þ þ ui
(3)
where the probability of being a leader depends on
an individual’s education level, on-the-job learn-
ing, cognitive ability and noncognitive ability. We
estimate the model using various econometrics
techniques such as linear probability model and
Probit model. We further investigate the potential
endogeneity issue of ability measures using multi-
ple indicator approach and instrumental variable
estimation.
III. Data and measurement for leadership and
abilities
Our data originate from the Programme for the
International Assessment of Adult Competencies
(PIAAC) survey that was initiated by the OECD.2
The PIAAC survey collects internationally com-
parable data about key cognitive and workplace
skills of adults between the ages of 16 and 65.
Compared with other adult ability surveys, the
4 T. TONG ET AL.

main advantage of PIAAC is that it offers several
in-depth measures of cognitive and noncognitive
abilities. In our study, we use United States survey
data, and we include only full-time employees.3
Our primary measure for leadership is defined
based on the occupational classification of the
respondent’s job at the 2-digit level as defined by
the International Standard Classification of
Occupations (ISCO-08). If the occupation is
‘Manager’, then the individual is defined as a -
leader.4 With this definition based on ‘Manager’,
we have 187 leaders and 1,306 non-leaders.
In addition, we construct two additional leader-
ship measures: ‘Lead5’ and ‘Lead10’, which are
defined based on the number of individuals an
individual supervises.5 This measure has the
advantage of excluding individuals who have
a manager title but do not actually supervise
a team. Specifically, Lead5 defines leaders as who
supervise more than five employees. Based on this
measure, we have 261 leaders and 1,087 non-
leaders. Lead10 defines leaders as those who lead
more than 10 employees. With this definition, we
have 154 leaders and 1,194 non-leaders. The cor-
relation between Manager and Lead5 is 0.37,
between Manager and Lead10 is 0.34, and between
Lead5 and Lead10 is 0.73.
The PIAAC survey collects information on each
individual’s cognitive abilities in three domains and
provides three new measures on cognitive abilities:
numeracy (NUM), literacy (LIT) and problem sol-
ving (PS). Each of the three skill domains measures
related and yet somewhat distinct dimensions of an
individual’s skill set and is represented by a 500-
point scale (ranging from 0 to 500) with higher
points denoting a higher level of desirable skills.6
The definitions of each of the three domains pro-
vided by the PIAAC are as follows (OECD 2013) :
Numeracy: "the ability to access, use, interpret
and communicate mathematical information and
ideas in order to engage in and manage the math-
ematical demands of a range of situations in adult
life" (OECD 2013).7
Literacy: "the ability to understand, evaluate,
use and engage with written texts to participate
in society, to achieve one’s goals, and to develop
one’s knowledge and potential" (OECD 2013).8
Problem solving (in technology-rich environ-
ments): "the ability to use digital technology, com-
munication tools, and networks to acquire and
evaluate information, communicate with others
and perform practical tasks" (OECD 2013).9
The sample statistics for the three cognitive
abilities are reported in Table 1. Leaders have
higher average cognitive ability scores in all three
domains than non-leaders. The average scores for
leaders in numeracy, literacy and problem solving
are 2.95, 3.00 and 2.98, respectively, whereas the
scores for non-leaders are 2.64, 2.78 and 2.80,
respectively; and the difference in all three mea-
sures between leaders and non-leaders are statisti-
cally significant. In addition to this, the standard
deviations of the measured cognitive abilities of
the leaders are smaller than those of the non-
leaders.
Similar to cognitive ability, there are many dif-
ferent ways to measure noncognitive ability. Some
commonly used indices of noncognitive ability
include Rotter’s measure of locus of control
(Rotter 1966), the Rosenberg self-esteem scale
(Rosenberg 1965), the Five-Factor Model of
Personality (Muller and Plug 2006) and emotional
intelligence (Goleman 2000). For instance,
Heckman, Stixrud and Urzua (2006) use Rotter
Locus of Control Scale and Rosenberg Self-
Esteem as noncognitive ability measures. The

3
We exclude individuals in agriculture industry and the military. These industries involve different mechanisms of becoming a leader, and are not considered
in the current study.
4
Individuals are defined as managers if they belong to one of these occupational groups: administrative and commercial managers (ISCO = 12), production
and specialized services managers (ISCO = 13), hospitality, retail, and other services manager (ISCO = 14).
5
These two measures are constructed based on two PIAAC questions: ‘Do you manage or supervise other employees?’ and ‘How many employees do you
supervise or manage directly or indirectly?’ The response options for the first question include ‘Yes’ and ‘No’ and for the second question include ‘1 to 5
people’, ‘6 to 10 people’, ‘11 to 24 people’, ‘25 to 99 people’ and ‘100 or more people’.
6
When presenting descriptive statistics and regression analyses, we divide all cognitive ability scores by 100. Thus, the numeracy, literacy, and problem
solving scores range from 0 to 5 in the analyses that we apply.
7
Numeracy tasks require, for instance, calculating the number of layers of tea candles packed in a box given other information or calculating the cost of
a trip from a motor-vehicle logbook.
8
The literacy test contains questions that require finding the right contact information in a simulated website, identifying the name of the author of
a particular book in a simulated library website, and extracting certain information from given paragraphs or tables.
9
Problem-solving questions include tasks such as reserving a meeting room on a particular date using a reservation system, organising a family get together,
and locating information on a spreadsheet and then e-mailing the requested information.
 APPLIED ECONOMICS 5

Table 1. Descriptive statistics.

Manager = 1 Manager = 0
Variable Obs. Mean SD Obs. Mean SD Difference
Cognitive skills
Numeracy 187 2.950 0.446 1306 2.638 0.516 0.312*
Literacy 187 2.995 0.387 1306 2.783 0.453 0.213*
Problem solving 181 2.975 0.398 1144 2.801 0.403 0.174*
Noncognitive skills
Perseverance (yes = 1) 187 0.439 0.498 1306 0.340 0.474 0.099*
Openness to learning (yes = 1) 187 0.519 0.501 1306 0.442 0.497 0.077*
Social trust (yes = 1) 187 0.342 0.476 1306 0.263 0.441 0.079*
Education degree
Below high school 187 0.016 0.126 1306 0.077 0.267 −0.061*
High school 187 0.283 0.452 1306 0.508 0.500 −0.224*
Bachelors 187 0.471 0.500 1306 0.242 0.428 0.229*
Masters or Ph.D. 187 0.230 0.422 1306 0.173 0.378 0.057*
Others
Male (yes = 1) 187 0.647 0.479 1306 0.510 0.500 0.137*
Experience (years) 187 20.476 8.106 1306 19.087 9.133 1.389*
Married (yes = 1) 147 0.878 0.329 1061 0.744 0.437 0.134*
Either parent had a college degree (yes = 1) 187 0.492 0.501 1258 0.418 0.493 0.074*
Number of children 187 1.599 1.255 1305 1.530 1.314 0.069
Industry Dummies
Manufacturing (yes = 1) 187 0.241 0.429 1305 0.227 0.419 0.014
Trade (yes = 1) 187 0.214 0.411 1305 0.184 0.388 0.030
Service (yes = 1) 187 0.545 0.499 1305 0.589 0.492 −0.044
When presenting descriptive statistics and regression analyses, we divide all cognitive ability scores by 100. Thus, the numeracy, literacy, and problem
solving scores range from 0 to 5.
* indicates that the difference between leader and non-leader is significant at the 10% significance level.

Rotter scale measures the degree to which indivi-
duals feel they control their life and the Rosenberg
scale measures perceptions of self-value.
In our study, based on the information available
in the PIAAC data, we construct three noncogni-
tive ability measures including perseverance,
openness to learning and social trust. They are
reflected in the five-factor model of personality,
which includes extraversion, agreeableness, con-
scientiousness and openness to experience, and
are likely to be important for leadership.
In our data, perseverance is measured with the
question ‘I like to get to the bottom of difficult
things.’10 The respondents select their response
from a 5-point scale with the anchor points ‘not at
all’, ‘very little’, ‘to some extent’, ‘to a high extent’
and ‘to a very high extent’. To be categorized in the
high-perseverance group, the response has to be ‘to
a very high extent’. Thus, if a person responds to the
statement ‘to a very high extent’, we set Perse = 1.
Otherwise, Perse = 0. We place a strict rule on
defining a high level of perseverance because the
responses per se are subjective, and a person may be
more likely to be overly positive in a self-evaluation.
Similarly, openness to learning is measured by the
response to the statement ‘I like learning new
things’. We set Learn = 1 if an individual responds
‘to a very high extent’. Otherwise, Learn = 0. Social
trust is measured with two statements: ‘There are
only a few people you can trust completely’ and ‘If
you are not careful, other people will take advantage
of you.’ Responses to the statements are again mea-
sured on a 5-point scale with the anchor points
‘strongly agree’, ‘agree’, ‘neither agree nor disagree’,
‘disagree’ and ‘strongly disagree’. We define that
individuals have good social trust (i.e. Strust = 1)
if they answer ‘disagree’ or ‘strongly disagree’ to at
least one of the statements; otherwise, Strust = 0.
Table 1 presents the descriptive statistics for the
noncognitive abilities of leaders and non-leaders.
Among leaders, individuals with strong perseverance,
openness to learning and good social trust account for
44%, 52% and 34%, respectively. The percentages
drop to 34%, 44% and 26% for non-leaders. The
largest difference in percentage points is observed in
perseverance. It is likely that leaders generally need
a high level of perseverance to solve complex pro-
blems when completing their work duties.
Education is measured by individuals’ highest
academic degrees such as high school diplomas,

10
Other studies use similar questions to measure perseverance such as ‘I have achieved a goal that took years of work’ and ‘I have overcome setbacks to
conquer an important challenge’ (Duckworth et al. 2007).
6 T. TONG ET AL.

bachelor’s, master’s and Ph.D. degrees. Similar to
the patterns of cognitive and noncognitive abil-
ities, leaders have higher levels of education than
non-leaders. Among leaders, 70% have bachelor’s
degrees or higher, whereas, among non-leaders,
only 42% have a similar level of education. In
addition, Table 1 shows that leaders generally
have more years of work experience, and men
are more likely to be a leader (i.e. 65% of the
leaders). Family background variables include
marital status, number of children and parental
education. In general, leaders are more likely to
be married and have higher educated parents.
Table 2 shows that the cognitive ability measures
are highly correlated with each other (all correlations
> .82). The correlation between numeracy and lit-
eracy is the highest. It is possible that comprehending
a numeracy task requires good literacy. Table 2
further indicates that cognitive and noncognitive
abilities are also positively correlated, but the correla-
tions are much smaller (all correlations < .20) than
those within the cognitive abilities.
Figure 2 depicts the distributions of the three
cognitive ability measures separated by education
level. Clearly, as education level increases, the
mean ability levels increase for all cognitive ability
measures as well. On average, individuals with
master’s or PhD degrees have the highest abilities,
and those with no high school diploma have the
lowest. The largest increase is observed for numer-
acy. Individuals with master’s or PhD degrees
have a 38.7% higher average score in numeracy
than those with less than a high school education.
It is interesting that problem-solving scores show
the smallest gap between different educational
levels.
For noncognitive abilities, as shown in Table 3,
the proportion of individuals with higher

Table 2. Correlations between abilities.

Problem
Numeracy Literacy solving Perseverance Openness to learning Social trust
Numeracy
Literacy 0.886*
Problem solving 0.824* 0.858*
Perseverance 0.097* 0.061* 0.065*
Openness to learning 0.043 0.057* 0.066* 0.354*
Social trust 0.153* 0.154* 0.187* −0.011 0.141*
The numbers are correlation coefficients between different ability measures.
* indicates the correlation is significant at the 10% significance level.

Figure 2. Kernel distributions of three cognitive abilities by education levels.


Table 3. Noncognitive ability and education level.
Education Perseverance Openness to learning
Below High School 23.5% 45.1%
High School 21.5% 41.7%
College 32.1% 52.0%
Masters or Ph.D. 31.6% 55.1%
The percentages represent proportions of individuals with high noncogni-
tive abilities (i.e. perseverance = 1) at each education level.
noncognitive abilities is larger for individuals with
college or graduate degrees. For instance, for those
with graduate degrees, the proportion with high
perseverance is 8.1 percentage points higher than
for those with less than a high school education.
A similar pattern is found for openness to learning,
where the difference between graduate education
and below a high school education is 10 percentage
points. For social trust, the gap between the higher
and lower educational levels is even larger.
According to Hooghe, Marien and de Vroome
(2012), individuals with an attitude of trust are likely
to develop good social relationships and a clear aca-
demic orientation, which in turn leads to higher
education.
IV. Cognitive, noncognitive abilities and
leadership
The three measures of cognitive abilities adopted by
the OECD discussed above are considered to be com-
prehensive measures of one’s cognitive ability (OECD
2013). Therefore, following the literature, we treat
them as adequate proxy of unobserved abilities. In
addition, both cognitive and noncognitive abilities
develop early in life and reach stability in adolescence
or early adulthood at latest (e.g. Cunha and Heckman
2007; Borghans, Well, and Weinberg 2008). Thus,
those abilities can be considered as antecedents of
later outcomes including occupational status and lea-
dership position. More specifically, for cognitive abil-
ities, a large number of studies in phychology have
shown that intelligence exhibits an impressive level of
stability from childhood throughout adulthood all the
way to old age (e.g. Deary et al. 2000; Schalke et al.
2013). Based on Cunha and Heckman (2007), indivi-
duals’ cognitive ability becomes stable after age 10 or
so, and thus early interventions are much more effec-
tive than later interventions. Regarding the
11
Because three cognitive ability measures are highly correlated, incorporating them together in the model causes significant multicollinearity issues. The
coefficient of problem solving ability remains to be positive and significant, but literacy becomes negative and significant.
APPLIED ECONOMICS 7
noncognitive abilities, Cobb-Clark and Schurer
Social trust (2012) demonstrates the remarkable stability of the
17.6%
20.2% Big Five traits of personality. Specht, Egloff and
37.0% Schmukle (2011) reported rather high levels of stabi-
39.9%
lity for several aspects of personality. The implication
of the stability means that those ability measures
should not change much over one’s life, and thus the
labour market experience such as being a leader will
not change them to an extent that it may influence the
outcomes of this study. The reverse causality should
not bias our estimation results.
Therefore, in our baseline estimation, we apply
the Linear Probability Model (LPM) and Probit
estimation, and the results are reported in Table 4.
The advantage of LPM is that it does not require
any assumptions about the underlying distribution
of the error term, and it is robust to heteroscedas-
ticity. We first include the three cognitive ability
measures separately in Models 1–3.11 We found
each of the three cognitive ability measures has
positive and significant impact on leadership. By
comparing the coefficients of three cognitive abil-
ities, we find that the problem-solving ability has the
largest impact on leadership. More specifically,
when problem-solving score increases by 10 points,
the probability of being a leader increases by
1.03 percentage points, while the number for
numeracy and literacy is 0.92 and 0.74, respectively.
It is generally believed that problem solving ability
is vital for leadership, which comes along with the
need to solve problems on a regular basis at different
occasions and in a variety of circumstances. The
problems a leader faces at work are often complex
or non-transparent. A high level of problem-solving
ability can help leaders define exactly what the pro-
blem is and help them generate appropriate solutions
to the specific problem at hand (Mumford et al.
2000). Connelly et al. (2000) found that complex
problem-solving skills, together with social judge-
ment skills and leader knowledge, accounted for sig-
nificant variance in leadership even after controlling
for general intelligence, motivation, and personality.
Because problem solving has the largest impact on
leadership compared to numeracy and literacy, we
use problem solving ability as a indicator of cognitive
ability measure in the following estimation.
8 T. TONG ET AL.

Table 4. Ability and leader.

LPM LPM LPM LPM Probit
Numeracy 0.092***
(0.022)
Literacy 0.074***
(0.025)
Problem solving 0.103*** 0.100*** 0.097***
(0.031) (0.031) (0.028)
Perseverance 0.048* 0.037*
(0.025) (0.021)
Openness to learning −0.002 −0.001
(0.025) (0.021)
Social trust 0.023 0.018
(0.025) (0.022)
Education 0.135*** 0.148*** 0.138*** 0.132*** 0.124***
(0.024) (0.025) (0.025) (0.025) (0.023)
Experience 0.004*** 0.004*** 0.005*** 0.005*** 0.005***
(0.001) (0.001) (0.001) (0.001) (0.001)
Male 0.044** 0.057*** 0.061*** 0.060*** 0.057***
(0.022) (0.021) (0.023) (0.023) (0.021)
Married 0.030 0.036* 0.037* 0.035 0.047*
(0.020) (0.020) (0.022) (0.022) (0.027)
Parent education −0.005 −0.001 −0.002 −0.003 −0.006
(0.021) (0.021) (0.022) (0.022) (0.021)
Number of children 0.015* 0.014* 0.015* 0.014 0.010
(0.008) (0.008) (0.009) (0.009) (0.009)
Constants −0.349*** −0.325*** −0.417*** −0.425***
Industry dummies Yes Yes Yes Yes Yes
No. of observations 1162 1162 1040 1040 1040
R^2 0.080 0.074 0.074 0.076
F-statistics 10.535 10.015 9.503 7.225
Pseudo R^2 0.114
The Probit model presents the marginal effects evaluated at the means of the covariates.
For LPM estimation, the values in the parenthesis are robust standard errors.
Number of observations are different when we change the definitions of leadership.
*** denotes significance at 1%, ** denotes significance at 5%, and * denotes significance at 10%.

The results from Models 1 to 3 also show
that if an individual has a college degree, the
probability of being a leader increases by 14–-
15 percentage points, depending on different
cognitive ability measures. Experience also has
a significant positive impact on leadership,
which is in line with previous findings on the
relation between experience and leadership
(Lazear 2012). In addition, being married
increases the probability of being a leader,
while gender and parental education do not
seem to influence a person’s chance of being
a leader.
After evaluating the impact of the cognitive
ability measures, we then add noncognitive
ability measures in Model 4. The inclusion of
noncognitive ability solves the omitted ability
problem to a large extent as some human capi-
tal variables that are included in Model 3 might
have been correlated with noncognitive ability
measures (e.g. perseverance). Out of the
noncognitive ability measures, only persever-
ance shows a positive and significant effect.12
More specifically, a high degree of perseverance
increases the probability of being a leader by
4.8 percentage points. Perseverance (i.e. main-
taining high energy levels even in difficult cir-
cumstances) is an essential trait for leaders.
Leaders, who oftentimes face unexpected diffi-
culties, obstacles and discouragement, need
strong perseverance to lead the team and
work toward the goal that is to be achieved.
Additionally, Model 5 presents the results for
an alternative estimation method (i.e. Probit
estimation). The results of the Probit estima-
tion in Model 5 are consistent with the OLS
estimation of the LPM model (Model 4).
Considering the fact that many people may
have a manager title but do not actually super-
vise a team, we test the robustness of our esti-
mation results by constructing two additional
measures of leadership: supervising at least 5

12
If we include the noncognitive measures in the model separately, the results are similar. That is, perseverance is the only significant predictor out of the
noncognitive abilities.
 APPLIED ECONOMICS 9

Table 5. Ability and leader-different measures of leadership. number of employee is challenging because it
Lead5 Lead10 needs more problem-solving, planning and
LPM Probit LPM Probit
working as well as cooperation. Our results
Problem solving 0.093** 0.099** 0.125*** 0.127***
(0.037) (0.039) (0.031) (0.030) show that a 10-point increase in problem-
Perseverance 0.050 0.048 0.047* 0.040* solving score increases the probability of
(0.031) (0.030) (0.025) (0.023)
Openness to learning −0.018 −0.017 −0.010 −0.006 Lead5 by 0.93 percentage points, and it
(0.030) (0.030) (0.025) (0.023) increases to 1.25 for Lead10 in LPM estimation.
Social trust 0.015 0.014 −0.006 −0.007
(0.031) (0.031) (0.025) (0.024) Additionally, perseverance changes from insig-
Education 0.055* 0.053* 0.055** 0.053**
(0.033) (0.032) (0.027) (0.024)
nificant to significant when we use the higher
Experience 0.004*** 0.005** 0.004*** 0.004*** criteria for leaders (i.e. Lead10)
(0.002) (0.002) (0.001) (0.001)
Male 0.063** 0.064** 0.014 0.013 Our results are consistent with previous litera-
(0.029) (0.029) (0.024) (0.022) ture. For instance, Adam et al. (2018) showed that
Married 0.046 0.054 0.004 0.004
(0.031) (0.034) (0.026) (0.026) both cognitive and noncognitive abilities of CEOs
Parent Education −0.034 −0.038 −0.017 −0.021 in large firms are higher than those in small firms,
(0.029) (0.029) (0.024) (0.022)
Number of children 0.017 0.016 0.016 0.013 which indicated that the importance of ability
(0.011) (0.012) (0.010) (0.009) increases as a leader supervises more employees.
Constants −0.256** −0.388***
Industry dummies Yes Yes Yes Yes
No. of observations 934 934 934 934
R^2 0.043 0.056 V. A further investigation of the endogeneity
F-statistics 4.657 4.830
Pseudo R^2 0.053 0.087 issue
For LPM estimation, the values in the parenthesis are robust standard
errors. The above baseline estimation provides strong evi-
*** denotes significance at 1%, ** denotes significance at 5%, and * dence that cognitive and non-cognitive abilities have
denotes significance at 10%.
a significant effect on an individual’s chance of being
in a leadership position and on the intensity of the
people (Lead5) and 10 people (Lead10). The leadership role measured by the number of people
results are presented in Table 5, with Models supervised. Our estimation is based on the exogeneity
1 and 3 showing the results of LPM, and assumption of those ability measures. We believe that
Models 2 and 4 displaying the results of the exogeneity assumption is reasonable given the
Probit estimation. stable nature of one’s abilities. Moreover, because
Overall, human capital measures in Table 5 we compare estimates across ability measures and
exhibit the same pattern with previous estima- across different intensity of leadership, any potential
tions in Table 4. Problem-solving ability, edu- bias would be mitigated or differenced out in such
cation and experience remain significant comparisons.
predictors of leadership. In addition, none of Yet it is desirable to investigate the potential endo-
the noncognitive ability measures is significant geneity problem as well as how sensitive the above
when Lead5 (i.e. leading more than 5 employ- results are. We will proceed in two steps: we first relax
ees) is used to measure leadership, and perse- the assumption that the ability variables are the mea-
verance becomes positive and significant when surement of one’s true ability and instead treat them
Lead10 (i.e. leading more than 10 employees) is as indicators for ability and then use Multiple
used to measure leadership. A high degree of Indicator (MI) approach; and second, we allow for
perseverance increases the probability of being the possibility of the reverse causality and apply the
a leader by 4.0–4.7 percentage points. Instrumental Variable approach to estimate the
Additionally, Table 5 shows that the effects model.
of both cognitive and noncognitive ability MI approach imposes a weaker assumption
become more critical when the number of because ability measures do not have to perfectly
employees supervised by the leader increases capture the true ability but only need to be indicators
from 5 to 10, which is to be expected given of it (see e.g. Hanushek et al. 2015). More specifically,
that we are more selective in defining what based on the MI technique, we treat one ability mea-
constitutes a leader. Supervising a greater sure as the indicator and others as instruments in the
10 T. TONG ET AL.

estimation.13 In theory, the roles of all three indica- Table 6. Multiple indicator and instrument variable approach.
tors, numeracy, literacy and problem solving are Manager
MI IV
interchangeable in the MI estimation. Because pro-
Problem solving 0.088** 0.046
blem-solving ability is likely to be a more compre- (0.037) (0.101)
hensive measure of one’s ability than the other two, Perseverance 0.048* 0.048*
(0.025) (0.025)
we use it as the indicator of cognitive ability, and use Openness to learning −0.002 0.000
numeracy and literacy scores as instruments in the (0.024) (0.024)
Social trust 0.025 0.022
estimation. For noncognitive measures, we keep them (0.025) (0.027)
College education 0.135*** 0.146***
in the model without applying the MI and IV treat- (0.025) (0.033)
ments. The main reason is that, based on the five- Experience 0.005*** 0.004***
(0.001) (0.001)
factor model of personality, an individual’s personal- Constants −0.209** −0.275
ity (noncognitive) can be classified into five categories Control variables Yes Yes
No. of observations 1040 1031
including extraversion, agreeableness, conscientious- Adjusted R2 0.076 0.074
ness, openness to experience and neuroticism (Muller Endogeneity test (Chi2) 0.315(0.575)
Over-identification test (Chi2) 2.282(0.320)
and Plug 2006). Each category represents distinguish- The values in the parenthesis are robust standard errors.
ing personality aspects that could have independent *** denotes significance at 1%, ** denotes significance at 5%, and *
denotes significance at 10%.
impact on one’s labour market outcomes. Therefore,
our three measures of noncognitive ability (i.e. perse-
verance, openness to learning and social trust) can fit
into the first four categories, and thus can be used as how such a possibility may affect our results, we
exogenous regressors.14 apply the Instrument Variable (IV) estimation.
The results of the MI estimation are reported in Moreover, the IV estimator can help resolve the
Table 6. The estimates are in line with previous endogeneity problem caused by both measurement
estimation in Tables 4 and 5. Human capital mea- error and reverse causality, although with stronger
sures including problem solving ability, persever- requirement for finding good instruments.
ance, education and experience remain to be The IV estimation requires that an instru-
significant predictors of leadership in the MI ment should be correlated with abilities mea-
approach, and the magnitudes are similar. The sured based on test scores but not with the
results indicate that our results above are quite error term. Due to data limitation, such instru-
robust. The three new measures of cognitive abil- ments are difficult to find. In particular, the
ities are multi-dimensional and comprehensive, endogenous variable is the problem solving
and they adequately capture one’s ability. ability measure in the model, and we need to
The above MI estimation helps resolve the poten- find instruments, that is, correlated with it but
tial measurement problem for true abilities. not with the error term. We first adopt two
Additionally, there is another potential endogeneity instruments based on the PIAAC questionnaire.
problem caused by the possible reverse causality, i.e. The first one is based on the question ‘whether
the measured ability may be related to the experi- the test language is the same as the language
ence of being a leader as one learns from the job. usually spoken at home’. Specifically, language
Because of the stability of one’s ability, such spoken at home may negatively affect test
a reverse influence should be relatively small, espe- scores if the home language is not English.
cially given the age when an individual was put in However, they should be exogenous to the indi-
a leadership position.15 However, in order to see vidual’s inner ability.

13
The Multiple Indicator approach is closer to classic approach of errors-in-variables but is less restrictive. More specifically, for the MI approach, in equation
y ¼ α0 þ xβ þ γq þ v, where q represents the omitted ability variable. Suppose we have multiple indicators of q from q1 to qn , and they are highly
correlated. Indicator q1 can be written as q1 ¼ δ0 þ δ1 q þ a1 , where covðq; a1 Þ ¼ 0 and covðx; a1 Þ ¼ 0. If we rewrite q as a function of q1 and then
substitute it back into the original equation, we then have y ¼ α1 þ xβ þ γ1 q1 þ v  γ1 a1 , where γ1 ¼ δγ1 . Then, we express each of the rest of the
indicators (i.e. q2 to qn ) as a function of q, so we obtain an error term for each indicator of q (i.e. a1 to an ). Since all the common component in indicators
has been controlled by q, MI approach assumes that the error terms are uncorrelated, then q2 to qn become valid instruments for q1 .
14
Because of data limit, we do not have useful information in investigating the potential endogeneity issue for noncognitive ability measures.
15
The average age of leaders in our sample is 42.
 APPLIED ECONOMICS 11

The second instrument is based on the question VI. Conclusion

‘whether an individual was interrupted by some
In this study, we investigate the effects of an indivi-
other activity, task, or event’. If individuals were
dual’s human capital on leadership. We employ var-
interrupted during survey, they may not be able to
ious measures of human capital based on cognitive
concentrate on the tests, and, thus, have lower test
and noncognitive ability, in addition to the traditional
scores. Because these interruptions are likely to be
education-based and experience-based human capital
beyond the individual’s control, they are exogen-
measures. We also adopt different leadership mea-
ous to the person’s real ability and leadership
sures that can represent the degree of the leadership
related factors in the error term.
to investigate the human capital impact. We find that
In addition, based on previous literature, we use
problem-solving ability shows the strongest effect on
industry average abilities as instruments (Lin et al.
leadership among cognitive measures, and persever-
2011). Specifically, if the endogeneity problem is spe-
ance exhibits a positive and significant effect on lea-
cific for individuals, but not for industries, then net-
dership among noncognitive ability measures. In
ting out this individual-specific component yields
addition, as an individual supervises more employees,
a measure that only depends on the underlying char-
the effects of cognitive and noncognitive abilities
acteristics of particular industries. In our case, the
become more pronounced. Moreover, we explore
required ability may be particular to industries
the potential endogeneity issue caused by measure-
because of the nature of representative jobs of the
ment error and reverse causality via Multiple-
industry, thus an individual’s test scores may be cor-
Indicator estimation and Instrumental Variable esti-
related with others who also work in this industry.
mation to test the robustness of our results, and the
Moreover, according to previous studies (e.g. Cunha
tests generally support our findings.
and Heckman 2007), cognitive ability is well devel-
Leadership is vital to the development of any orga-
oped at a relatively young age at around age 10, test
nisation. By providing a quantitative analysis about
scores of other individuals in the same industries
the impact of human capital on leadership, our results
should not have a direct impact on this individual’s
should shed new light on identifying individuals with
real ability. Therefore, we use industry average test
strong leadership potentials. In the US, only around
score (excluding the individual himself) as instru-
30–50% of large corporations have a specific frame-
ments for the cognitive ability measure.
work for the identification of leadership potential
The results of the IV estimation are reported
(Dries and Pepermans 2012). Therefore, it is desirable
in model 2 in Table 6. First, the over-
to have a set of criteria and guidelines that firms can
identification test could not be rejected, indi-
use to assess leadership potential for efficient job
cating that there is no evidence against the
assignments and promotions.
validity of our instruments. Additionally, the
results are generally consistent with the above
estimation. In particular, the perseverance, edu-
cation and experience are significant predictors Disclosure statement
for leadership with positive signs, while the No potential conflict of interest was reported by the authors.
problem solving ability becomes insignificant,
possibly due to the inefficiency of the IV esti-
mation. Moreover, the Hausman tests cannot Funding
reject the null hypothesis of exogeneity of the
This study was funded by the National Natural Science
ability measures in the model. Thus, the poten-
Foundation of China (71773151) and the Fonds National
tial endogeneity bias does not seem to be de la Recherche Luxembourg (ATTRACT "ASKI21").
significant.
A note of caveat in our IV estimation is that we
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