The common conception of a working life is one of a fairly linear career progression, with earnings rising alongside our seniority and experience. This three-stage life of education-work-retirement is increasingly being consigned to the past, however, as a more fluid and multi-stage life becomes the norm.
As a result, it’s crucial for us to better understand the ways in which people’s income may fluctuate throughout their life if we’re to help them navigate these ups and downs and grapple with the inequality that the World Economic Forum highlighted as a major societal risk in its recent Global Risks report.
This is especially so as stagnation in wage growth has been a well-documented issue since the 2008 financial crisis, with this contributing to the general discontent with life that drove movements like the Brexit vote and the Trump election.
The evolution of wages
A recent study from Bocconi University explores the various factors that may contribute to changes in income throughout our careers. The paper utilizes longitudinal administrative data from Germany to shed light on the long-term benefits of apprenticeship training programs for workers entering the labor market after completing secondary school.
The study examined the types of jobs workers chose and considered both monetary and non-monetary job characteristics, such as flexibility and location, which influence workers’ job choices.
The study’s data compared the wage growth of workers who underwent apprenticeship training before entering the labor market to those who did not receive any further training. While apprentices’ wages are low during their training period, after completing the training, their wages increase sharply and continue to grow slowly over the next two decades.
In contrast, those who enter the labor market directly after secondary school experience rapid wage growth in the first five years, but their real wage growth slows down significantly after that. The study showed that twenty years after graduating from secondary school, workers who underwent apprenticeship training have wages that are about 15% higher than those who did not.
What causes the change
The researchers used a causal model to evaluate the channels that benefit workers who choose apprenticeship training while addressing potential self-selection biases. The analysis revealed that apprenticeship training offers access to better jobs with more growth potential, leading to sustained wage growth later in the career. It also allows for a faster accumulation of work experience and reduces the likelihood of unemployment while easing the transition back into work.
The researchers highlight that vocational training programs may not be suitable for all workers as they choose these programs according to their innate abilities. Therefore, more than an assessment of vocational training programs based on immediate returns alone is needed, and it is crucial to consider the longer-term effects of such programs on career outcomes.
Furthermore, the study explored the societal advantages of adopting apprenticeship programs, which can be a costly investment for companies and taxpayers. By calculating the expenses of training and comparing them to the benefits of enhancing workers’ career opportunities and lowering unemployment rates, the overall societal rate of return was found to be approximately 10%. Thus, the study demonstrates that apprenticeship training yields substantial benefits to both individuals and society.
Skills matter
The analysis of longitudinal wage data revealed that skill development is the primary driver of early wage growth. Workers with routine-manual skills experience substantial productivity and earnings increases in the first few years of their careers, while those with cognitive-abstract skills, acquired through apprenticeship training, enjoy sustained wage growth throughout their careers.
Another important factor is job mobility, which accounts for approximately one-third of wage increases within the first five years of employment. By switching between jobs, young workers can find positions where they are most productive, resulting in a significant boost in earnings.
While workers change jobs to maximize their income, non-monetary factors such as working conditions, interactions with colleagues, and ease of commuting to the workplace also play an essential role. In the early years of their career, non-monetary job amenities account for about a quarter of job-to-job transitions. As such, employers must consider not only monetary incentives but also non-monetary factors when designing job packages.
“Change can be really difficult, especially when our jobs are so wrapped up in how we identify ourselves as human beings,” Karoline Strauss, Professor of Organizational Behavior and Human Resource Management at ESSEC told me recently. “Transitioning to new occupations can pose a real threat to that identity, which can make moving that much harder and have to be considered by employers and policymakers alike.”
The right career choices
The choices workers make about jobs that require routine-manual or cognitive-abstract skills are affected by two things: their specific skills for a certain sector that aren’t visible, and their educational background.
In addition, the skills workers gain from working in various occupations in a particular sector also play a significant role. This can lead to a “lock-in” effect, where workers who were initially assigned to a sector for which they have less talent accumulate experience that is specific to that sector. As a result, they may not want to move to jobs where they have more talent.
During recessions, the problem of occupational lock-in can get worse because job opportunities in different sectors may be limited. This can make it even harder for workers to switch sectors. With technologies like chatGPT promising to disrupt a growing number of occupations, this kind of understanding of how our careers ebb and flow, together with how we might pivot our careers (or not) is likely to be increasingly crucial.
