Written by: Stephen Hsu
Primary Source: Information Processing
I’m occasionally asked about financial returns to cognitive ability. As a rough rule of thumb, judging from the graphs below (obtained here), I would say:
On average, an increase of IQ by one SD corresponds to ~ $30k per annum of additional income. (Somewhat less than 1 SD in income; the distribution is far from normal.)
By early middle age, individuals > 90th percentile in IQ have, typically, more than twice the wealth of individuals who are of average IQ.
If you can find better data than what is shown below, please let me know. (How do bottom decile adults manage to earn ~ $40k per annum, on average? Does this include transfer payments?)
Of course, you can turn this around to estimate the increased (heritable) cognitive ability endowments of high income parents relative to average parents. This might help to clarify causality in studies such as this one: “Studies show that children from low-income families have smaller brains and lower cognitive abilities.” (Even Nature susceptible to faulty logic.)
Income mobility is strongly affected by IQ. In fact, IQ is a much stronger predictor variable than race for escaping the bottom quintile of income (Pew Trust report; NLSY again, AFQT=IQ scores):
This last figure is very problematic for the “Social Status/Wealth causes IQ” position. It seems to be the other way around: the kids escaping bottom quintile childhoods all experienced poverty, but the ones with higher cognitive ability were more likely to move up. (Recall that adopted children tend to resemble their biological parents much more than their adoptive ones; family environment has a limited effect on IQ, which is highly heritable.)
Pew: Individuals with higher test scores in adolescence are more likely to move out of the bottom quintile, and test scores can explain virtually the entire black-white mobility gap. Figure 13 plots the transition rates against percentiles of the AFQT test score distribution. The upward-sloping lines indicate that, as might be expected, individuals with higher test scores are much more likely to leave the bottom income quintile. For example, for whites, moving from the first percentile of the AFQT distribution to the median roughly doubles the likelihood from 42 percent to 81 percent. The comparable increase for blacks is even more dramatic, rising from 33 percent to 78 percent. Perhaps the most stunning finding is that once one accounts for the AFQT score, the entire racial gap in mobility is eliminated for a broad portion of the distribution. At the very bottom and in the top half of the distribution a small gap remains, but it is not statistically significant.