The Influence of Non-Cognitive Skills on Wages within and between Firms : Evidence from Bangladesh's Formal Sector

Many employers and employees believe that non-cognitive skills are an important contributor to labor market success. This study has assessed the empirical evidence for such a claim in the case of Bangladesh by evaluating unique employer-employee matched labor market data. The analysis is based on data collected from 6,981 workers in 500 formal sector firms in Bangladesh's five largest formal economic sectors. Using ordinary least squares and firm fixed-effect models, the study assesses correlations between wages and the so-called "big five" personality traits, and augments the analysis with the latent personality scores captured by the Rasch model. Comparing the ordinary least squares and fixed-effect models reveals statistically significant correlations between personality traits and wages, within and across firms. The results appear to indicate that non-cognitive skills are correlated with a worker's likelihood of achieving success in the labor market. Although many of the findings are consistent with the literature, the analysis reveals specific patterns that appear to be unique to Bangladesh, including a positive correlation between “emotional stability” and wages and a negative correlation between "grit" and wages, especially among manufacturing workers. Differences across firms could indicate that firms that offer higher wages may tend to attract workers with distinct types of non-cognitive skills, whereas differences within firms may indicate that variations in non-cognitive skills are associated with disparities in firm-level wage structures. Correlations between wages and personality traits are more prominent among large firms than among small or medium-sized firms