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April 11, 2007
Inexperienced is better?
Last week's column by David Leonhardt was on broader issues of the recent Circuit City employee debacle -- One Safety Net Is Disappearing. What Will Follow?
But the corporate version of the welfare state is not just about retirement and health care. Another, much less obvious, piece of it is the steadily increasing pay that most workers receive over the course of their careers. All else equal, a typical worker in his early 60s makes about 50 percent more than a worker in his early 30s.
This arrangement produces some enormous benefits for society. It allows Americans to enjoy ever-rising living standards over their lives and helps them pay some big expenses, like their children’s college tuition and their parents’ elder care, that start to hit in middle age.
In strictly economic terms, however, paying people based on their age is a bit skewed. Sixty-year-olds are indeed more productive than 30-year-olds, studies have shown, but not 50 percent more productive. Experience isn’t quite as valuable as we might like to believe. In effect, most companies are underpaying their younger workers and overpaying their older ones.
This somewhat uncomfortable fact was a big part of the extraordinary layoff announcement from Circuit City Stores last week. On Wednesday, the company dismissed 3,400 people, or about 8 percent of its work force, not because they were doing a bad job and not because the company was eliminating their positions. Instead, executives said the workers were being paid too much and that the company would replace them with new employees who would earn less. It was the second such layoff at Circuit City in the last five years, and it offered an unusually clear window on the ruthlessness of corporate efficiency.
What he didn't point out were some questions about the economic logic and obvious problems with our public policy response. First, the logic. Accord to Leonhardt, studies show that 60 year olds are not 50% more productive than 30%. Meaning that experience isn't as valuable as we think. But, I have to ask what type of jobs we are looking at. In many old industrial era jobs, productivity doesn't really increase that much over time. Once you learn the few tricks of the trade, you are pretty much set. In other cases, the tricks of the trade take a long time to learn and skills are constantly refined. In yet other cases, experiences and judgment is continually increasing. The latter is more likely to be the case in information and knowledge rich activities that characterize the I-Cubed Economy. Conversely, it is often thought that creative genius declines with age. Mathematicians, for example, are said to do there best work in their 20's and 30's.
On the policy side, we need to examine our assumptions as to the pay off from experience. Our unemployment, training/re-training and labor market polices all have assumptions about age and experience. For example, the most obvious are the wage insurance proposals, which explicitly assume that a workers pay will go up as they gain more experience. If Circuit City is correct, no amount of wage insurance will help those laid off workers.
So, before we immediately jump to the economic and policy case, let's understand the specifics rather than over generalize. As we craft our new labor policies, we need to understand that this labor market may be very different from what we saw in the past. And we need to re-think our assumptions to keep up (much like all workers need to do to keep their experience current).
Posted by Ken Jarboe at April 11, 2007 8:01 AM
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