“The most important resource in any economy or organization is its human capital - that is, the collective knowledge, attributes, skills, experience, and health of the workforce,” said Human capital at work: The value of experience, a recent research report by the McKinsey Global Institute. Human capital development starts in early childhood, continues through formal educations, and grows as a person acquires and deploys new skills through their working life. The value of human capital can be approximated by an individual’s lifetime earnings, and represents roughly two-thirds of their total wealth.
“Human capital is much more than a macroeconomic abstraction,” notes the report. “Each person has a unique, living, breathing set of capabilities. They belong to the individual, who decides where to put them to work. The degree of choice is not limitless, of course. People are the products of geography, family, and education; their starting points matter. Having career options also depends on an individual’s abilities and attributes, their networks, their family obligations, the health of the broader labor market, and societal factors. While we recognize these constraints, career moves are nevertheless an important mechanism for expanding skills and increasing earnings.”
McKinsey’s study is focused on the contributions of work experience to a person’s human capital. The research analyzed a dataset containing the de-identified histories of all the job moves made by about a million workers in each of four countries: the US, UK, Germany, and India. The study traced the work history of each individual and their lifetime earnings starting with the first job after the last degree obtained and after all subsequent role moves. For each role move, the study estimated its skill distance, defined as the the opportunity to acquire new and additional skills in the new job. Finally, the study calculated both the share of lifetime earnings attributed to the entry-level skills acquired through formal education, and the share of lifetime earnings attributed to work experience.
Overall, lifetime earnings are significantly higher in advanced economies and in occupations with high education requirements. On average, individuals in both these cases start their working life with relatively high entry-level skills compared to individuals in less developed economies and in occupations with lower education requirements. As a result, work experience plays a bigger role in the lifetime earnings of individuals in less developed economies and in occupations with lower education requirements.
The methodology underlying the study is explained in great detail in Appendix B of the report. Let me summarize McKinsey’s key findings:
Human capital accounts for two-thirds of an individual’s lifetime net worth, with work experience contributing between 40% and 60% of the value of human capital over a typical working life. While formal education is an important driver of a person’s lifetime earnings, learning continues throughout that person’s work history. “Organizations set up their working environments with systems and practices that help employees become more productive. When people enter these settings, value is created. In addition to earning wages, workers gain knowledge and new capabilities that they carry with them for the remainder of their careers.”
In advanced economies, individuals start their work life with high entry-level skills due to their relatively high levels of educational attainment. The contributions of work experience to their lifetime earnings are quite similar in the three advanced economies involved in the study: 40% in the US, and 43% in both Germany and the UK.
The situation is quite different in emerging economies. Lifetime earnings are significantly lower, and individuals start their work life with lower entry-level skills due to their lower levels of educational attainment. Work experience is thus a more important driver of lifetime income, contributing 58% of lifetime earnings in India. Countries with similarly low levels of educational attainment will likely exhibit similar high levels of work experience contributions to their lifetime earnings.
Work experience accounts for a greater share of lifetime earnings in occupations with lower education requirements. “People who start out in occupations with higher educational and credentialing barriers (such as lawyers and dentists) earn more than other workers over their lifetimes. For most of them, entry-level skills contribute a larger share of those earnings. The reverse is generally true for people who start out in occupations with lower educational requirements. They typically earn less over a lifetime, with the greater share driven by work experience.”
The report includes a number of concrete examples of the share of lifetime earnings corresponding to work experience for occupations that require both high- and low-levels of education attainments. For example, for US occupations that require college degrees or higher, - e.g., STEM, health, business, and legal professionals, - their high lifetime earnings are largely driven by the required high entry-level skills, and significantly less so by work experiences. On the other hand, for occupations that don’t require college degrees, - e.g., agriculture, food service, production and warehousing work, and community services, - lifetime earnings are the least-driven by entry-level skills and the most driven by work experiences.
However, some people defy the odds. Greater educational attainment generally correlates to higher lifetime earnings. “Yet educational disadvantage does not have to lock in destiny - at least not for everyone. In the United States, for example, our lifetime earnings projections show a subset of people who overcome the odds. Of particular note, 28 percent of high school graduates have higher earnings potential than the median holders of associate degrees, and 37 percent of associate degree holders could earn more than median bachelor’s degree holders over their lifetimes.”
Role moves bring new skills and can unlock higher earnings - and in most cases, people are moving to new organizations. When a person makes a move for higher pay, their new job generally requires significant new skills and responsibilities compared to their previous job. “The new role may be a major learning opportunity, or it may be a better match that enables someone to deploy existing skills that they have not been utilizing. … “Skills derived through experience account for 60 to 80 percent of lifetime earnings for those who move up but only 35 to 55 percent for those who stay flat or drop down.”
“The most upwardly mobile cohorts in the sample make both frequent moves and bold moves In the United States, for example, people who moved into higher earning quintiles averaged 4.6 moves during the observed period, while those who stayed flat averaged 3.7 moves. The upwardly mobile in the United States and India made moves with an average skill distance of 30 to 40 percent; those who stayed flat averaged only 20 to 30 percent. This growth in skills compounds with each move, resulting in a far bigger shift in capabilities and responsibilities over the entirety of a working life.”
Employers can attract and retain talent by recognizing potential, embracing mobility, and strengthening learning. Companies can help individuals build their experience capital by offering them training and opportunities for internal advancement. To stand out as a great learning organization and a magnet for talent, McKinsey recommends that companies focus on three key priorities:
- Evaluate current employees and candidates not only for their knowledge and skills but also for their potential and capacity to learn;
- Embrace mobility by creating both upward and lateral career paths within the organization so that employees can gain more varied experience; and
- Strengthen coaching and on-the-job training, particularly early in an employee’s tenure and whenever someone changes roles.
Workers should navigate their careers with intention - and choose their employers carefully. Finally, how can an individual maximize the value created by their work experience? “Controlling for differences in occupation, time spent early in a career with an effective organization (as defined by overall organizational health and greater emphasis on training and internal mobility) is associated with 50 percent of the variation in how experience adds to earnings. The remainder of the difference is associated with the boldness and frequency of moves that a person makes.”
“The pandemic appears to have prompted many workers to reevaluate their jobs, and many have been voting with their feet.” While higher pay is obviously a motivation, many are also looking for better working environments and flexibility. “Our research shows that bold role moves have the potential to propel workers forward. … [I]ndividuals who have the luxury of choosing each job move strategically can benefit in a lasting way by looking for learning opportunities and growth potential.”
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