Work is school

Work is just as important as school in learning and acquiring skills. This is the main conclusion of our study on Human Capital Accumulation at Work which served as background paper for the 2019 World Development Report on the Changing Nature of Work. The concept that one learns and builds skills through work is intuitive. Factory Girls (2008) illustrates the experience of Chunming, who grew up in a rural village with little exposure to the modern world. She moved to Dongguan to take her first job in a factory that made paint for toys. The next few jobs would teach her sales, help her climb up in a multilevel marketing firm, and then to training the salesforce for a company that sold space for storing ashes of the dead. The Power of Habit (2012) describes how a company like Starbucks helps employees learn emotional regulation, so that after an encounter with an angry customer, they do not carry any negative emotions over to their interaction with the next person in line. The skills learned on the job are not always the same as the ones taught in school. They are, nonetheless, skills that make a person more valuable to an employer.

The average person accumulates schooling for 10 years but works up to 50 years. Therefore, human capital accumulation at work could have important implications for long-run growth. Human capital is obtained during childhood, at school, and at work. Previous research has highlighted the considerable returns to early childhood investments and education, suggesting that pre-school and education investments could have important effects on economic development. While a substantial literature exists on the returns to work experience, the contributions of experience to human capital accumulation and development has received less attention, especially with regards to using returns to experience as an indicator for development. Returns to work may focus on aspects of welfare improvements that may capture whether an economy is “truly” developing instead of, for example, seeing its GDP increase as a result of natural resource exploitation. Our study fills this gap by studying wage-experience profiles and obtaining returns to experience (a proxy for learning at work) and education, using data for 24 million individuals from 1,084 household surveys and census samples across 145 countries. We employ a battery of checks to ensure we obtain the best estimates feasible. We then use an accounting framework to calculate and compare the the contribution of experience to human capital and economic development. This study builds on the work by Lagakos and co-authors (2018) and Bils and Klenow (2000).

There are several key insights we develop. First, we find that returns to experience are strongly correlated with economic development and that workers in developed countries may accumulate twice more human capital at work than workers in developing countries. Figure 1 shows the earning profiles of USA vs Bangladesh, and the average developing vs. developed economies. The earnings profile is steeper for developed than developing economies – a technical of way saying that workers in more developing economies earn more wages over time than developing economies. One interpretation of this finding is that workers acquire more skills at work in developed economies than developing economies

Figure 1: Wage-Experience Profiles for Developed vs. Developing Countries

_{Notes: This figure shows the average wage differential for the seven experience bins for the U.S., Bangladesh, developed countries (Dev’D) and developing countries (Dev’G) (using population ca. 2017 as weights). The 0 experience bin is the omitted group. Only samples from 1990 to 2016 are used.}

Figure 2 shows the relationship between the returns to experience and development for 138 economies. Rich economies such as Sweden and the Netherlands tend to have high returns to experience while poorer economies like Malawi have lower returns to experience.

Figure 2: Returns to Experience and Log Per Capita GDP

_{Notes: This figure plots the relationship between the estimated returns to experience and log per capita
GDP (PPP; constant 2011 USD; for the mean year in the data for each country). The sample consists of
138 countries (145 countries - 7 countries in the top and bottom 5% in estimated returns).}

Second, we find that experience vary across several economic and policy-relevant dimensions.  Returns are lower for individuals that experienced a recession in the initial years of their career, suggesting that recessions can have permanent effects via experience losses. This is especially important given the COVID 19 pandemic. We also find that economies that transitioned out of communism suffer the obsolescence of past experience, the effects of which lasts for several years afterward.  We also find that returns to experience are not correlated with initial stocks of experience nor education. This suggests that experience may not suffer from decreasing aggregate returns, and that experience may not be easily substituted by more education.

Finally, using an accounting framework we find that although the returns to experience are lower than education, work constitutes a larger number of years than education, and thus overall, the contribution of both to human capital and development are the same. Work experience directly explains about a third of cross-country differences, which is about as much as schooling.

The finding that work is just as important for learning as school has important ramifications. The prevalence of youth unemployment both in emerging and advanced economies incurs substantial economic losses in terms of lost human capital accumulation. Furthermore, the COVID 19 pandemic may have long lasting effects on human capital given much work experience is being lost. Governments should focus on creating jobs, especially those with high returns that allow works to acquire a diverse range of skills.

References:

Bils, Mark and Peter J. Klenow, “Does Schooling Cause Growth?” American Economic Review 90 (5): 1160–1183.

Lagakos, David, Benjamin Moll, Tommaso Porzio, Nancy Qian, and Tedd Schoellman (2018). “Life Cycle Wage Growth across Countries.” Journal of Political Economy 126(2): 797-849