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August 16, 2023

Implications of work experience for economic development

How important are skills picked up on the job for long-run economic growth?

Tyler Smith

Source: DragosCondrea

Countries around the world invest heavily in education to ensure they have a competent and skilled labor force that keeps their economies growing. But just as important to long-run growth may be how much workers learn on the job.

In a paper in the American Economic Journal: Macroeconomics, authors Remi Jedwab, Paul Romer, Asif M. Islam, and Roberto Samaniego estimate the returns to work experience and explore how it varies across countries. They find globally that while returns to education are four times higher than returns to experience, returns to experience are strongly correlated with economic development and have a more immediate impact on income.

Their results come from over a thousand household surveys and census samples across 145 countries between 1990 and 2016. Figure 3 from the authors’ paper depicts the relationship between returns to experience and GDP.

Figure 3 from Jedwab et al. (2023)

The x-axis indicates the logarithm of per capita GDP at purchasing power parity and constant 2011 US dollars; the y-axis indicates the estimated percentage increase in monthly wages for an additional year of work experience. 

The chart reveals a U-shaped pattern, where poor countries have higher returns than middle-income countries and rich countries have the highest returns. However, the authors explore how the pattern holds when considering two potential biases.

First, high mortality rates may upwardly bias the estimated returns of poor countries. And second, the transition to capitalism among ex-communist countries—many of which are middle-income in the sample—could be temporarily undermining their returns to work experience. When these forces are taken into consideration, the relationship between returns and GDP becomes monotonically increasing.

Overall, the average return in the developing world—low- and middle-income countries—was 1.7 percent per year of experience. But that number jumps to 3.2 percent per year of experience for rich countries. 

The findings suggest that work experience may contribute as much to income as education, albeit the former has a faster impact than the latter. As a result, policymakers may want to weigh the tradeoffs between reforming the school system and reforming the labor market.