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Arthur T Knackerbracket has processed the following story:

A new study by Jeroma Adda (Department of Economics) finds that the acquisition of skills is the main contributor to higher salaries for workers, with the magnitude of the effect differing according to the type of skill and the career stage of the worker. Although workers can acquire skills on the job, those who undergo training before entering the job market generally obtain greater wages and are in unemployment less often.

People make a series of choices throughout their careers: whether to get educated/trained before working, which job offers to accept, or whether they should quit their current job. Each decision has an impact on earnings that may unfold over many years, and understanding their effects requires not only examining immediate returns but longer-term outcomes. With this aim, Professor Adda and Christian Dustmann (University College London), in a forthcoming paper in the Journal of Political Economy, estimate a mathematical model to understand the determinants of wage growth. Using comprehensive data on labor market outcomes of German men over several decades, they find that workers' ability levels, their accumulation of human capital, and changing of jobs across different sectors and firms all have significant positive contributions to earnings.

To unpack their findings, it is first important to understand that research on labor markets distinguishes the tasks workers perform into two categories: routine-manual (RM) tasks, which follow well-defined and repetitive procedures that require a modest amount of training; and cognitive-abstract (CA) tasks, which require more technical and creative capabilities. To estimate the returns for each type of skill, the authors classify each occupation according to the predominant type of task. Thus they are able to go beyond the differentiation of returns to different jobs and can estimate the returns to task-specific work experience. Their results indicate that the accumulation of RM and CA skills over the course of an individual's career is the most important driver of wage growth. RM skills contribute more significantly to increases in worker productivity and earnings in the first years of their careers, but once a set of basic skills has been acquired their contribution to wage growth reduces to zero. On the other hand, CA skills take a longer time to be accumulated, and thus take longer to affect earnings, but have a longer-lasting impact, sustained throughout the individuals' career. These differential returns translate to workers in the CA sector earning, on average, higher wages than those in predominantly RM sectors.

[...] The authors also find that mobility of workers across the labor market contributes to higher salaries. Switching between different jobs generates a significant increase in earnings, but this is concentrated in the early years of the worker's career, namely the first job move. Though this change produces large gains, these quickly decline and additional mobility does not seem to contribute to larger returns. However, the authors also observe the existence of lock-in effects: workers are initially allocated to a sector for which they are not the most suited, but the accumulation of experience specific to that sector disincentivizes them from moving to jobs in other sectors.

More information: Jerome Adda et al, Sources of Wage Growth, Journal of Political Economy (2022). DOI: 10.1086/721657

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