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Wage returns for work experience: Development and urbanisation

Globally, on average, people spend ten years in school but work for 40 years. People learn valuable skills in school and at work. Students who advance on to employment have the opportunity to continue to accumulate human capital and wage increases in relation to their work experience. In developing economies, students face obstacles in accruing such employment gains.

Developing countries have large shares of their workers concentrated in the agricultural sector, manual occupations, the informal sector, and rural areas, where there may be less scope for learning than in the rest of the economy. This could potentially explain why returns to experience – the extent to which wages increase for each extra year of work experience – are lower in developing countries than in developed countries.

Wage returns and work experience: A global study

To shed light on this issue, we use microdata from 23 million individuals in more than 1,000 household surveys and censuses in 145 countries to estimate measures of these returns to experience for as many countries and dimensions as possible.

  • Developed versus developing countries

Figures 1 and 2 below show the respective wage-experience profiles of developed countries and developing countries. As can be seen (see the grey dashed line labelled “Aggregate”), a worker with 30 years of work experience earns almost twice more than a worker with no experience in a developed country, but only 50% more in a developing country. Translated in terms of “returns”, these profiles imply that wages increase by 3.6% per extra year of work experience in developed countries vs. 1.9% in developing countries.

Fig.: Wage-experience profiles for developed countries (Left) and developing countries (Right)

  • Urban versus rural contexts

Wage-experience profiles are flatter in rural areas than in urban areas, but even more so in developing countries than in developed countries. A worker with 30 years of experience earns only about ten percentage points more in urban areas than in rural areas in developed countries. In developing countries, this gap increases to more than 25 percentage points! This suggests that the currently observed global trend towards urbanisation – i.e. fast urbanisation in developing countries – could promote human capital accumulation at work and dramatically raise wages.

However, one can also see that the urban profile is flatter in developing countries than in developed countries. In other words, similarly experienced workers earn more (relative to unexperienced workers) in the cities of developed countries than in the cities of developing countries. This suggests that there may be less scope for learning in developing country cities.

Implications: Urbanisation and migration

While current urbanisation trends or migration-inducing policies could increase returns to work experience in the aggregate, the question is whether these effects can be large enough to bridge the gap in the returns between developing countries and developed countries. Unfortunately, our analysis finds that these gaps are not large enough and that policies incentivising developing country workers to move to urban areas will not bridge the gap.

However, country-wide policies that facilitate human capital accumulation at work and fluidify labour markets so that workers can move up the ladder to better jobs that fit their skills profile can help developing countries increase their returns to work to the levels of developed countries.

 

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